Options Trading at EEX Milan, 15 September 2016
Norbert Anhalt Key Account Manager Power and Environmental Markets
[email protected]
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Agenda
1. Foundation of options 1.1. Explanation of options 1.2. Option pricing models 2. Options at EEX 2.1. Options on Power futures 2.2. Exercise/Assignment 2.3. Basic option strategies 3. Margining 3.1. Types of margin 3.2. Margin calculation
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Explanation of options Futures vs. Optionen
Unconditional
Conditional
Derivative market
Futures
Optionen (Call / Put)
Buyer (long)
Seller (short)
Buyer (long)
Seller (short)
has to pay at expiration
has to deliver at expiration
Right to exercise (buy or sell)
has to fulfill if the buyer exercises (deliver or take)
No payments on the trading day
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Imbalance of rights is equalized by the payment of an option premium
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Explanation of options Possible option positions
Option
Call (Buy option)
Put (Sell option)
Long (Buy Call)
Short (Sell Call)
Long (Buy Put)
Short (Sell Put)
Right to buy at strike price
has to deliver at strike price in case of being exercised
Right to sell at strike price
Has to take at strike price In case of being exerised
First step (buy or sell) = Opening ; Second step (buy or sell) = Closing i.e.
If you sell an option first and then buy it back: 1. Sell to Open 2. Buy to Close
To sell an option is also called as to write an option Copyright 2013 – All rights reserved
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Explanation of options Payout Profiles of the 4 possible positions
Long put
Profit
Profit
Long call Strike
Strike 0
0
Premium
Loss
Loss
Premium
Price of underlying
Profit
Profit
Price of underlying
Premium
Premium Strike
Strike Short call
Price of underlying
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Loss
Loss
0
Short put Price of underlying
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Explanation of options Example
Profit
Futures price
Loss
Profit/Loss profile of a power consumer referring to the power price
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Explanation of options Example
Profit
Futures price
Pay off of the Call at expiration A
Supply costs
Loss
The buyer of a call option is hedged against rising prices but can participate on falling markets
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Explanation of options Example
Profit
Futures price
Loss
Pay off of the Call at expiration + supply costs
accrued pay off
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Option pricing models Black & Scholes Formula
Option pricing models are expected to calculate a price for an european styled Call C and a Put P with the strike K and a remaining life time t for an underlying with the price S. It is given, that: At the end of ist life time an option will cause the following payments: CT = max(ST − K;0) PT= max(K − ST;0)
exercise price K remaining life time t
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Option pricing models Black ’76 vs. Black/Scholes model •
No interest rate for financing the underlying in the Black ’76 model (build the position cost neutral).
•
Black ’76 seems theoretically und practically more appropriate for pricing commodity options than Black/ Scholes.
•
Both pricing models can only assume the price paths of energy prices roughly
•
Both pricing models presume constant volatility (does not work in real markets)
•
Black 76 is the best approach at this time
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Option pricing models Options on Futures at EEX •
Parameters for option pricing models Strike price Price of underlying Expected volatility Duration Risk free interest rate
EEX uses Black model (Black ´76)
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Option pricing models Parameters
parameter
Call
Put
F(t) ↑
↑
↓
K ↑
↓
↑
r ↑
↓
↓
σ ↑
↑
↑
t ↓
↓
↓
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Option pricing models Implied volatility & volatility smile • Implied Volatility for different option strike prices
„Volatility Smile“ Copyright 2013 – All rights reserved
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Option pricing models Pricing of Options
Option value
Time value of option The highest time value is at the money
out of the money
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Strike price at the money
Intrinsic value of option
in the money
Price of underlying
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Options on Power Futures Options standards
Option types by underlying
Option types by exercise style
Options on spot market products: Underlying is a spot market product that will be delivered and paid
European Option: Exercise only on the last trading day possible
Options on Futures: Underlying is a Future that will be delivered long/short
American Option: Exercise is possible on every day of the options life time
Option on Index: Cash settlement of the difference between the strike price and the index price
Asian Option: Payout value depends on average price of underlying during the options life time
Options at EEX Normally Options on Futures are future-styled (Variation margin), but at EEX they are traditionally styled: Premium is fully due on the day of the trade and there is no daily Variation Margin as e.g. at BUND-Future options Copyright 2013 – All rights reserved
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Options on Power Futures Strike prices
Exercise price in 1 [€/Mwh] / Settlement price of the underlying contract [€/MWh]
Options on Power
42.00 1.00 €/MWh
Depending on the market needs EEX will introduce further option series.
41.00
40.00
39.00
38.00
Depending on the market needs EEX will de-list option series.
3 series at the beginning of trading (in-/ at-/ out-of-the money)
Settlement price of the underlying
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Call option (Buy) Put Option (Sell)
Trading Days
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Options on Power Futures Phelix (Germany/Austria) Options on Phelix-Base-Futures are available for the following delivery periods:
Month 1
Month 2
Month 3
Month 4
Month 5
Quarter 1
Quarter 2
Quarter 3
Quarter 4
Quarter 5
Year 1
Year 2
Year 3
Quarter 6
For Phelix Base Year options, EEX set up short-dated options with quarterly expiries
Product:
Last Trading Day:
Phelix-Base-Month-Future for January Phelix-Base-Quarter-Future for the 1st Quarter
Third Thursday in December
Phelix-Base-Month-Future for February to December Phelix-Base-Quarter-Future for the 2nd to 4th Quarter Phelix-Base-Year-Future Short-Dated (APR, JUL, OCT)
Four exchange trading days before start of the delivery period
Phelix-Base-Year-Future
Second Thursday of December
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Options on Power Futures France, Italy, Spain The Power Options on French-Base-Futures, Italian-Base-Futures, Spanish-Base-Futures, are available for the following delivery periods:
Month 1
Month 2
Quarter 1
Quarter 2
Year 1
Year 2 Unlike Phelix Base Year options, EEX did not yet set up short-dated options for the new markets
Product:
Last Trading Day:
Phelix-Base-Month-Future for January Phelix-Base-Quarter-Future for the 1st Quarter
Third Thursday in December
Phelix-Base-Month-Future for February to December Phelix-Base-Quarter-Future for the 2nd to 4th Quarter
Four exchange trading days before start of the delivery period
Phelix-Base-Year-Future
Second Thursday of December
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Carbon Option products on EEX
Options with Dec expiry on EUA Futures DEC 2016
Launch: 17th Ocober
on EUA Futures DEC 2017
on EUA Futures DEC 2024 Product:
Last Trading Day*:
EUA DEC Futures
is the last Monday of December. If this day is not an exchange trading day or if it is a public holiday in Great Britain or if one of the 4 days following the last Monday is not an exchange trading day, the Last Trading Day is the penultimate Monday of the maturity month.
Options on EUA DEC Futures with December expiry
Three Exchange Trading days before the expiry of the corresponding December contract of the EUA Futures Contract
*Same as with competitor Copyright 2013 – All rights reserved
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Exercise/Assignment • Options can be manually exercised until 3:00 p.m.: Exchange Member exercised, even if they are out of the money A not exercised, even if they are in the money partially exercised • Allocation via random selection in case of partial exercise: • All exercised and allocated Options to be finally fulfilled through B the booking of Futures from 5:30 p.m., and all non-exercised Option positions to be matured. • Automatic Exercise is possible as a percentage or absolute methods
Long positions 1L
C
3S
D
Lot
5S
E
1S
F
Call-Option is exercised by the buyer < 3:00 p.m. … … and leads at 5:30 p.m. to registration of… LongPosition in the Option (Buyer)
…a Long Position in the Future
Put-Option is exercised by the buyer < 3:00 p.m. … and leads at 5:30 p.m. to registration of … … a Short Position in the Future
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… a Short Position in the Future
Exchange Member
9L
Short positions 1S
Assignment
Exercise
ShortPosition in the Option (Seller)
… a Long Position in the Future Page 20
Initial Margin calculation Example:
1500S OEUA DEC16 0.29 €/ t 4.50 € (Delta 0.852)
1000L FEUA DEC16 4.89 € / MWh
Single Margin Parameter: 0.81 € / t = Scanning Range 810 € per lot
Scenario ID
1500S OEUA DEC16 4.50 €
1000L FEUA DEC16 4.89 € / t
Portfolio
Price in € / t
P&L
Change in € /t
P&L
P&L
Scenario 13: Price:-1,00;Vol:1,00;Wt:1,00
0.054
354,000
0.810 €
-810,000
-456,000
Scenario 11: Price:1,00;Vol:1,00;Wt:1,00
1.204
-1,371,000
0.810 €
810,000
-561,000
Scenario 16: Price:-3,00;Vol:0,00;Wt:0,33
0.001
143,055
0.802 €
-802,000
-658,945
• • •
Gross margin requirement for option position: Gross margin requirement for future position: Total gross margin requirement:
•
Net margin requirement for portfolio :
•
Cross margining savings: Copyright 2013 – All rights reserved
1,371,000.00 € 810,000.00 € 2,181,000.00 € 658,945.00 € 70% Page 26
Market structure – Phelix options Open Interest per Trading Day
TWh
26 active members (YtD, Jun)
90 Previous Year
Current Year
80 70
Volume: 99.0 TWh (YtD, Jun)
60 50 40 30 20 10
1 7 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97 103 109 115 121 127 133 139 145 151 157 163 169 175 181 187 193 199 205 211 217 223 229 235 241 247 253
0
Volume Phelix Options (Exchange + TR)
Volume [TWh] 30
Months
Quarters
Years
25 20 15 10 5 0 JAN
FEB
MAR
APR
MAY
JUN
JUL
2015
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AUG
SEP
OCT
NOV
DEC
JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
2016
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Market structure – New markets Volume French Options (Exchange + TR)
Volume [TWh] 6,00
Months
Quarters
Years
5,00 4,00 3,00
Open interest in July: 9.8 TWh
2,00 1,00
0,00 JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
JAN
FEB
MAR
APR
MAY
2015
JUN
JUL
AUG
SEP
OCT
NOV
DEC
2016
Volume Italian Options (Exchange + TR)
Volume [TWh] 0,50
Months
0,45
Quarters
Years
0,40 0,35 0,30 0,25
Open interest in July: 1.0 TWh
0,20 0,15 0,10 0,05
0,00 JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
JAN
FEB
MAR
APR
MAY
2015
JUN
JUL
AUG
SEP
OCT
NOV
DEC
2016
Volume Spanish Options (Exchange + TR)
Volume [TWh] 0,50
Months
0,45
Quarters
Years
0,40
Open interest in July: 1.75 TWh
0,35 0,30 0,25 0,20 0,15 0,10 0,05
0,00 JAN
FEB
MAR
APR
MAY
JUN
JUL
2015 Copyright 2013 – All rights reserved
AUG
SEP
OCT
NOV
DEC
JAN
FEB
MAR
APR
MAY
JUN
JUL
2016
AUG
SEP
OCT
NOV
DEC
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Option products Fees
Power Options
Trading fee* Clearing fee
Exchange trades in power options with a premium of 0.15 €/MWh or more
0.250 ct/MWh
0.250 ct/MWh
Exchange trades in power options with a premium of less than 0.15 €/MWh
0.125 ct/MWh
0.125 ct/MWh
* Delta hedge discount: An exchange trade entailing a delta hedge in a power option, i.e. a power option and its future base in the same exchange transaction, the transaction fee for the future base will be reimbursed provided that (i) the option and delta trade are concluded at EEX on the same trading day and (ii) the trade ID of the future base is indicated when concluding the option. The discount is only available when establishing an initial future position.
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Advantages of using options • No margining for long positions at all • With long positions: only participation on the expected movement, for movements in the other direction only the premium can be lost • With short positions: Opportunity to gain money with „limited orders“ • Higher profit optimization at certain expectations for the market price development by the opportunity of combining different options
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