Valuing Monthly Reset Energy Options with Daily Settlements

Summary

The question describes an energy option that runs across several months. For each month, its strike resets to that month’s first-of-month index, and daily settlements below that level generate a payoff based on the difference. The question asks how to value the product and calculate its Greeks, and whether an accumulator model is appropriate.

The response identifies the structure as resembling an option on a swing swap. It recounts a historical, desk-level approach: estimate intrinsic value from a forecast of prices over the remaining part of the month, then compare the estimate with observed option values, when available, to infer extrinsic value. In that account, auditors limited recognized value to intrinsic value. The responder says they knew of no analytical model for the product at the time. This is practical historical experience, not a complete pricing framework: it gives no stochastic assumptions, calibration procedure, formula, or Greek calculations, and its accounting constraint may not apply to other settings.

Key ideas

• The contract resets its strike monthly using the first-of-month index and pays against daily settlements.
• The product is described as resembling an option on a swing swap.
• A historical valuation approach estimated remaining-month intrinsic value from a price forecast.
• Observed market option values could be compared with intrinsic estimates to assess extrinsic value.
• The response provides no general analytical pricing model or method for calculating Greeks.

Tags

# Structured Energy Option Pricing


# Structured Energy Option Pricing












Let's say I have an option with the following terms. This is for an energy product (ie natural gas)

- The contract will last for 6 months

- The payoff is the difference between the first of month index vs the daily settle price. For example if the first of month index is 3 dollars, the option pays the difference everyday the settle is below 3 dollars, and 0 if it is above.

- Every month, the strike changes to the first of month index for that respective month

I am trying to find how to price the option, along with the greeks. The closest option model I've found is an accumulator option but I am not sure if this falls in the same category

## Answer by MoRudy (score 0)

https://quant.stackexchange.com/a/85707

This question was asked over eight years ago...

This sounds like an option on a swing swap. The index gets set based on bid-week activity, and the daily's are evaluated against the set index price. When I worked on this very problem 20 years ago, we just estimated the intrinsic value based on our forecast for the balance of the month. If we were lucky enough to observe options values, then we would compare that against our values to extract what could be extrinsic value. In any case, the auditors would not let us book more than the intrinsic value.

At that time, there was no analytical model that could value this product to the best of our knowledge--not that we were the sharpest knife in the set.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.