1. finance
2. investing
3. options

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: norbert.anhalt@eex.com
Copyright 2015 – All rights reserved
Page 19