Trading Power Options at European Energy Exchange (EEX) Copyright 2016 All rights reserved Page 1
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1 Trading Power Options at European Energy Exchange (EEX) Copyright 2016 All rights reserved Page 1
2 Agenda 1. Explanation of Options 2. Option products on EEX 3. Margin calculation 4. Advantages of using options Copyright 2016 All rights reserved Page 2
3 Explanation of options Futures vs. options Unconditional Derivative market Conditional 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 Imbalance of rights is equalized by the payment of an option premium Copyright 2016 All rights reserved Page 3
4 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 2016 All rights reserved Page 4
5 Loss Profit Loss Profit Loss Profit Loss Profit Explanation of options Possible option positions Long call Long put 0 Premium Strike 0 Premium Strike Price of underlying Price of underlying 0 Premium Strike Premium Strike Short call Short put Price of underlying Price of underlying Copyright 2016 All rights reserved Page 5
6 Option products on EEX Options at EEX Option types by underlying Options on spot market products: Underlying is a spot market product that will be delivered and paid Options on Futures: Underlying is a Future that will be delivered long/short Option on Index: Cash settlement of the difference between the strike price and the index price Option types by exercise style European Option: Exercise only on the last trading day possible American Option: Exercise is possible on every day of the options life time Asian Option: Payout value depends on average price of underlying during a defined period Option types by payment Future styled: deviation of the premium is equalized via variation margin only Traditionally styled: Premium has to be fully paid one day after trading Copyright 2016 All rights reserved Page 6
7 Base Option products on EEX Month Futures Quarter Futures Year Futures Options on Phelix* Power Futures Options on French Power Futures Options on Italian Power Futures Options on Spanish Power Futures *Phelix: Index on the hourly auction power prices for the German/Austrian delivery zone Copyright 2016 All rights reserved Page 7
8 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 Call: Difference between the current Futures price (F t ) and the exercise price (K) or zero in case difference< 0 Time value 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 (F t ) or zero in case difference < 0 Copyright 2016 All rights reserved Page 8
9 Option products on EEX Phelix Options 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 Quarter 6 Year 1 Year 2 Year 3 For Phelix Base Year options, EEX set up short-dated options with quarterly expiries Product: Phelix-Base-Month-Future for January Phelix-Base-Quarter-Future for the 1st Quarter 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) Phelix-Base-Year-Future Last Trading Day: Third Thursday in December Four exchange trading days before start of the delivery period Second Thursday of December Copyright 2016 All rights reserved Page 9
10 Option products on EEX New markets The new Power Options on French-Base-Futures, Italian-Base-Futures, Spanish-Base-Futures, are available for the following delivery periods: Month 1 Quarter 1 Year 1 Month 2 Quarter 2 Year 2 Unlike Phelix Base Year options, EEX did not yet set up short-dated options for the new markets Product: Phelix-Base-Month-Future for January Phelix-Base-Quarter-Future for the 1st Quarter Phelix-Base-Month-Future for February to December Phelix-Base-Quarter-Future for the 2nd to 4th Quarter Last Trading Day: Third Thursday in December Four exchange trading days before start of the delivery period Phelix-Base-Year-Future Second Thursday of December Copyright 2016 All rights reserved Page 10
11 Option products on EEX Contract Month option Quarter option Year option Notation: Smallest tradable unit: Contract value: Position value: Prices are notated in per MWh with 3 digits after the point smallest possible price change (Tick Size): per MWh 1 contract Contract volume days*24 h e.g.: 30*24 = 720 MWh Summer / Winter time adjustments have to be considered days*24 h e.g.: 91*24 = 2,184 MWh Summer / Winter time adjustments have to be considered days*24 h e.g.: 365*24 = 8,760 MWh contract volume x option price example: 1 Year option: premium / MWh; contract value: 8,760 MWh x / MWh = 8, contract volume x option price x number of contracts example: 10x Year option: premium / MWh; Position value: 10 x 8,760 Mwh x = 87, Option Premium: Example: Option on F1BM April (Volume: 720 MWh); Option premium: / MWh contract value = 720 MWh x / MWh = 7.20 Copyright 2016 All rights reserved Page 11
12 Option products on EEX Exercise Date Underlying Dec YY Cal YY+1 Mar YY Jun YY Sep YY Dec YY Cal YY+1 Beside the general options for the Phelix 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 2016 All rights reserved Page 12
13 Option products on EEX Options can be manually exercised until 3:00 pm on the last trading day Exchange Member Long positions Exercise Assignment Short positions Exchange Member exercised, even if they are out of the money A 1L 1S C not exercised, even if they are in the money partially exercised Allocation via random selection in case of partial exercise: 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 B 9L 3S 5S 1S D E F Long Position in the Option (Buyer) Call Option is exercised by the buyer < 3:00 pm a Long Position in the Future and leads to registration of a Short Position in the Future Put Option is exercised by the buyer < 3:00 pm and leads to registration of Short Position in the Option (Seller) a Short Position in the Future a Long Position in the Future Copyright 2016 All rights reserved Page 13
14 Option products on EEX Power Options Trading fee Clearing fee Exchange trades in power options with a premium of 0.15 /MWh or more ct/mwh ct/mwh Exchange trades in power options with a premium of less than 0.15 /MWh ct/mwh ct/mwh 30 Monthly Volumes 2016 in TWh 120 Yearly Volumes in TWh January February March April May June Jan-Jun active Non-clearing Members in 2016, mainly via 3 brokers Copyright 2016 All rights reserved Page 14
15 Margin calculation Example: 50S CO1BY JAN YY 6100 (Delta 0.2) 10L F1BY JAN YY / MWh Additional Margin Parameter: 2.70 / MWh Scanning range 50 S CO1BY JAN L F1BY JAN / MWh Portfolio Price in / MWh Amount for closing Change in P & L Loss when closing / MWh , , , / MWh , , / MWh , , ,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 2016 All rights reserved Page 15
16 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 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 EMIR compliant Copyright 2016 All rights reserved Page 16
17 Contact: Norbert Anhalt Key Account Manager Power Phone Copyright 2016 All rights reserved Page 17
Trading Power Options at European Energy Exchange (EEX) Copyright 2015 All rights reserved Page 1
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