Journal of Energy Markets
ISSN:
1756-3607 (print)
1756-3615 (online)
Editor-in-chief: Derek W. Bunn
Covered option strategies in Nordic electricity markets
Antti Klemola and Jukka Sihvonen
Need to know
- Long forward, covered call and protective put strategies in the Nordic electricity markets are compared.
- The results show large and systematic differences between the strategies.
- On risk-adjusted basis, the protective put outperforms both the long forward and the covered call.
- The (near) at-the-money protective put strategies seem to be the best choices.
Abstract
ABSTRACT
We test the performance of popular option strategies in the Nordic power derivative market using twelve years of data. We find that protective put strategies outperform long forward and covered call strategies on a risk-adjusted basis, because the payoff function of the protective put seems a good fit to the market dynamics in both good and bad times. Detailed analysis reveals differences across moneyness levels and holding periods that can be further exploited. Different Delta levels of the analyzed strategies allow for flexible hedging solutions.
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