OTC COMMODITIES OPTIONS (CAPS)

Option products that are most frequently used in the commodity market are caps/floors and swaps. These have exactly the same structure as those in the interest rate markets, but are typically used to cover shorter time horizons.

An OTC cap/floor is similar to a compound option and will have multiple settlements (fixings), with dates that are pre-arranged at the outset, whereas a simple OTC option with only a single settlement, known as puts (the right to sell) and calls (the right to buy), will have a single settlement at maturity if European style and the potential for mid-maturity settlement/exercise if American style. It will perform in exactly the same way as options on stocks or options on currency.

Definition ...

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