Cookbook of CBOE Credit Event Binary Options (CEBO) - CBOE.com

3. Price Quotation and Theoretical Pricing
a. Option Price Quotation
A Single-Name CEBO pays $100,000 after a Credit Event is confirmed, but its
price is quoted based on a $100 payout. Since the quoted price reflects the
probability that a Credit Event will be confirmed times $100, it varies between $0
and $100. CEBO prices are quoted in dollars and nickels, e.g. $34.05, $34.10.
The effective price paid for the option is 1000 times the quoted price, based on a
notional contract value of $100,000= 1000* $100. Thus if the quoted price is
$34.05, the effective price is $34,050.
The estimated quoted price of a CEBO based on Dana Corp. a company that
went bankrupt in February 2006 is shown below next to the CDS spread of
DANA Corp. quoted by Bloomberg. As the bankruptcy approached, the DANA
CDS spread rose to 3422 basis points, suggesting an estimated recovery rate of
approximately 65%. At this point, the price of a CEBO referenced to DANA
should have theoretically reached $100, based on the assumed recovery rate of
0%.
Credit Spread Basis Points
3300
2800
2300
1800
1300
800
300
Sources: Bloomberg and CBOE
Market Prices DANA CORP as of close 2/28/06
CDS 5 Year Spread
Estimated 5-Year
CEDO Price
9/1/2005
9/13/2005
9/21/2005
9/29/2005
10/11/2005
10/19/2005
10/27/2005
11/8/2005
11/17/2005
11/29/2005
12/7/2005
12/15/2005
12/23/2005
1/4/2006
1/12/2006
1/23/2006
1/31/2006
2/8/2006
2/16/2006
2/27/2006
10
$100
$90
$80
$70
$60
$50
$40
$30
$20
$10
$-
CEBO Estimated Price