Dynamic delta option strategies in Nordic electricity markets

Antti Klemola

Abstract

This paper examines how electricity options traded in the Nasdaq OMX Commodities Europe financial market are priced compared with their corresponding futures contracts. For this purpose, the dynamic delta portfolio is constructed using quarterly options and an underlying futures contract. Given that the risk level of such a portfolio is adjusted on a daily basis, in such a manner that it matches the corresponding static futures strategy, we can directly calculate the price difference between the dynamic delta option strategy and the static futures strategy. We find some seasonality in the price differences between the static and dynamic strategies. When using calls, we find a significant  negative (positive)  price difference during winter (summer) quarters. In contrast, for puts, we find a significant  positive  price difference during winter quarters, but not during summer quarters. We also find that the winter and summer quarters are associated with the reported price differences, which are not as universally  related to the trends in electricity prices (ie, increasing or decreasing electricity prices).