ICE clears inaugural NWE propane swap option

Market: LPG
22/10/14

Ice has launched a new contract for 1000t options on northwest European propane swaps with the maiden trade cleared on 20 October.

Purchasing a put or call option gives the buyer a right, but not an obligation, to sell or buy, respectively, a swaps contract at a designated strike price at a specified time or within a specified timeframe.

The debut deal, brokered by Libra Fearnley Energy, is a put option for first-quarter 2015 northwest European propane. The strike price was set at $534/t, with the option costing $20/t for a 5,000t lot each month and expiring at the close of the first quarter. Swaps value for first-quarter propane was assessed by Argus on 20 October at $575/t, it has since waned $6/t to $569/t. The details of involved parties were kept private.

Put and call options on propane swaps do take place in limited numbers directly between counterparties and behind closed doors. But with ICE having now initiated northwest European propane options as a quoted entity, an increase in liquidity and public trading is expected. It will also give an opportunity to the industrial end-user to monitor risk management policy with a better flexibility to protect their margin rather than just covering risk with swaps.

Brokers have seen varied levels of interest in the new product. But trading volumes are expected to increase gradually as current risk management systems are not set up for the new tool.

One particular area highlighted for expansion is options on inter-regional spreads – most notably northwest Europe to US arbitrage trading given a mature market already in place for options on US propane swaps.

The new Ice contract - titled ‘Propane, Argus cif ARA Average Price Option' - operates an automatic exercise option upon expiry whereby options in profit with respect to the underlying reference price exercise into the underlying swaps contract automatically. Options at a loss instead expire automatically. Manual exercise or abandon of the position is not permitted.

The underlying reference price is stipulated as the average price of the daily Argus cif ARA large cargo propane quote for the period of the option in question.

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ICE clears inaugural NWE propane swap option

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Viewpoint: European HVO prices unlikely to ease in 2026

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