Trading Power Options at European Energy Exchange (EEX) Copyright 2015 – All rights reserved Page 1 Agenda 1. Explanation of Options 2. Option products on EEX 3. Margin calculation 4. Advantages of using options Copyright 2015 – All rights reserved Page 2 Explanation of options Futures vs. options Unconditional Conditional Derivative market Futures Options (Call / Put) Buyer (long) Seller (short) Buyer (long) Seller (short) has to pay at expiration has to deliver at expiration can exercise (buy or sell) has to fulfill if the buyer exercises (deliver or take) No payments on the trading day Copyright 2015 – All rights reserved Imbalance of rights is equalized by the payment of an option premium Page 3 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 Copyright 2015 – All rights reserved Page 4 Explanation of options Possible option 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 Copyright 2015 – All rights reserved Loss Loss 0 Short put Price of underlying Page 5 Option products on EEX Options at EEX Option types by underlying Option types by exercise style Option types by payment 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 Future styled: deviation of the premium is equalized via variation margin only 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 Traditionally styled: Premium has to be fully paid one day after trading 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 a defined period Copyright 2015 – All rights reserved Page 6 Option products on EEX Options on Phelix Futures Base Month Futures Quarter Futures Year Futures Options on other Futures Base Italian Futures French Futures Spanish Futures Nordic Futures Copyright 2015 – All rights reserved Page 7 Option products on EEX EEX uses the Black model (Black ´76) to calculate settlement prices • Parameters for option pricing and their impact on option prices Parameters Variable Call Put Underlying price F(t)↑ ↑ ↓ Strike price K ↑ ↓ ↑ Interest rate r ↑ ↓ ↓ Expected volatility σ ↑ ↑ ↑ Time to expiration t ↓ ↓ ↓ Intrinsic value Time value Call: Difference between the current Futures price (Ft) and the exercise price (K) or zero in case difference< 0 Difference between the current Option premium and the current intrinsic value Determined by time, interest rate and volatility Put: Difference between the current exercise price (K) and the Futures price (Ft) or zero in case difference < 0 Copyright 2015 – All rights reserved Page 8 Option products on EEX underlying option type Code maturity strike price Option on F1BM C, P O1BM JAN YY, FEB YY, … 3000; 3100; ... Option on F1BQ C, P O1BQ JAN YY, APR YY, … 3000; 3100; ... Option on F1BY C, P O1BY APR YY, JUL YY, OCT YY, JAN YY 3000; 3100; ... 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 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 Copyright 2015 – All rights reserved Page 9 Option products on EEX Contract Contract volume Month option days*24 h e.g.: 30*24 = 720 MWh Summer / Winter time adjustments have to be considered Quarter option days*24 h e.g.: 91*24 = 2,184 MWh Summer / Winter time adjustments have to be considered Year option days*24 h e.g.: 365*24 = 8,760 MWh Notation: Prices are notated in € per MWh with 3 digits after the point smallest possible price change (Tick Size): 0.001 € per MWh Smallest tradable unit: 1 contract Contract value: contract volume x option price example: 1 Year option: premium 1.000 € / MWh; contract value: 8,760 MWh x 1.000 € / MWh = 8,760.00 € Position value: contract volume x option price x number of contracts example: 10x Year option: premium 1.000 € / MWh; Position value: 10 x 8,760 Mwh x 1.000 € = 87,600.00 € Option Premium: Example: Option on F1BM April (Volume: 720 MWh); Option premium: 0.010 € / MWh contract value = 720 MWh x 0.010 € / MWh = 7.20 € Copyright 2015 – All rights reserved Page 10 Option products on EEX 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 Monthly Phelix Futures volumes (in TWh) 200 180 160 140 120 100 80 60 40 20 Short Term Month Quarter Copyright 2015 – All rights reserved Feb 15 Jan 15 Dez 14 Nov 14 Okt 14 Sep 14 Aug 14 Jul 14 Jun 14 Mai 14 Apr 14 Mrz 14 Feb 14 Jan 14 Dez 13 Nov 13 Okt 13 Sep 13 Aug 13 Jul 13 Jun 13 Mai 13 Apr 13 Mrz 13 Feb 13 Jan 13 0 Year Page 11 Option products on EEX Exercise Date Mar YY Underlying Jun YY Sep YY Dec YY Cal YY+1 Dec YY Cal YY+1 • Beside the general options for the Year Baseload Future, which expire at the 2nd Thursday in December there are also options with earlier expiry dates available. They are all fulfilled with the same Future contract. • Expiration of short dated options equals the expiry dates of quarter options Copyright 2015 – All rights reserved Page 12 Option products on EEX Exercise price in 1.00 €/Mwh steps / Settlement price of the underlying contract [€/MWh] Options on Phelix Base Month 60,00 1,00 €/MWh Depending on the market needs EEX will introduce further option series. 58,00 56,00 54,00 52,00 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 Copyright 2015 – All rights reserved Call option (Buy) Put Option (Sell) Trading Days Page 13 Option products on EEX Options can be Exchange manually exercised until 3:00 pm on the last trading day Member A exercised, even if they are out of the money not exercised, even if they are in the money partially exercised • Allocation via random selection in case of partial exercise: B • All exercised and assigned Options are fulfilled through the booking of Futures, and all non-exercised Option positions will expire. • Automatic exercise is possible as a percentage or absolutely Long positions 1L Exercise 9L Short positions 1S C 3S D 5S E 1S F Assignment Call Option is exercised by the buyer < 3:00 pm … … and leads to registration of… Long Position in the Option (Buyer) …a Long Position in the Future Put Option is exercised by the buyer < 3:00 pm … and leads to registration of … … a Short Position in the Future Copyright 2015 – All rights reserved … a Short Position in the Future Exchange Member Short Position in the Option (Seller) … a Long Position in the Future Page 14 Margin calculation Premium margin: • Current value of position to be closed at settlement price • Long positions reduce the margin requirement of short positions Additional margin: • Covering the risk of an option price change during the next trading day (overnight risk) • Different contracts can offset their single margin requirement, only upside or downside risk is taken (the higher one) • • • Maximum netting of all products long positions in options cause margin reductions but no positive margin Copyright 2015 – All rights reserved Page 15 Margin calculation Option price Range of possible price changes of the option Settlement Price day 2 Additional Margin Settlement Price day 1 Trade price Premium Margin time Trading day End of t day t+1 Copyright 2015 – All rights reserved End of day t+2 End of day t+3 Page 16 Margin calculation Example: 50S CO1BY JAN YY 6100 € (Delta 0.2) 10L F1BY JAN YY 53.70 € / MWh Additional Margin Parameter: 2.70 € / MWh Scanning range 50 S CO1BY JAN13 61.00 € Price in € / MWh Amount for closing 10L F1BY JAN13 53.70 € / MWh Change in € Portfolio P&L Loss when closing 56.40 € / MWh 1.489 652,182 2.70 -236,520 415,662 53.70 € / MWh 0.802 351,276 0.00 0.00 351,276 51.00 € / MWh 0.670 293,460 -2.70 236,520 529,980 • Margin requirement Options. 652,182 € • Margin requirement Futures: 236,520 € • Total margin requirement: 888,702 € But: • Maximum upside risk = 415,662 € < Maximum downside risk = 529,980 € • Net margin requirement 529,980 € Copyright 2015 – All rights reserved Page 17 Advantages of using options • Long positions: only participation in positive direction, in negative direction only the premium can be lost , insurance-like. • Short positions: Opportunity to use options as limited orders and gain money • Optimal participation on certain market price development by the opportunity of combining different options • Trading time and volatility strategies, Delta hedging, very liquid underlying • Cheaper way to trade futures due to EEX fee structure, no exercise fees • Automatic exercise available • No variation margin, no margining for long positions at all, margin effects different to futures, Full cross margining with all other ECC cleared assets • Products are EMIR compliant Copyright 2015 – All rights reserved Page 18 Contact: Norbert Anhalt Key Account Manager Power Phone +49 341 2156 247 Email: [email protected] Copyright 2015 – All rights reserved Page 19
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