Covered Option Strategies in Nordic Electricity Markets

34 Pages Posted: 20 Jan 2016

Date Written: June 2, 2015

Abstract

We test the performance of popular option strategies in the Nordic power derivative market using 12 years of data. We find that protective put strategies outperform long forward and covered call strategies on 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.

Keywords: option strategy, forward contract, electricity market, Nord Pool

JEL Classification: G13, G32, L94

Suggested Citation

Klemola, Antti and Sihvonen, Jukka, Covered Option Strategies in Nordic Electricity Markets (June 2, 2015). Journal of Energy Markets, September 2015, Available at SSRN: https://ssrn.com/abstract=2718131

Antti Klemola

University of Vaasa ( email )

P.O. Box 700
Wolffintie 34
FIN-65101 Vaasa, FI-65101
Finland

Jukka Sihvonen (Contact Author)

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101
Finland

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