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Options on emission certificates give the buyer the right but not the obligation to buy or sell a certain volume of certificates (underlying) at a future date and at a predetermined price (strike price). The cost of an option (premium) is paid upfront and is the only risk for the buyer.
There are two types of options:
- Call: it grants the buyer the right to buy the underlying certificates at the strike price. It can be exercised when the market prices are higher than the predetermined price.
- Put: it grants the buyer the right to sell the underlying certificates at the strike price. It can be exercised when the market prices are lower than the predetermined price.
Usually, the underlying of options on the emission certificates is the December future contract of the current year; for instance the underlying of an option with expiry date in June 2018 is the December 2018 future contract. The expiry dates are on a month basis and take place three trading days before the expiry of the corresponding future of the current month. They are European options, that is, the exercise can only take place on the day of expiry.
The exposure of a physical position can be replicated in exchange for a premium.
Options that can be used in multiple ways to create customized positions and cover risks.
Risk reduction (for the buyer)
No exposure to adverse price movements: the premium constitutes the maximum loss.
The graph shows the value at expiration of option contracts. This value (y axis) is obtained through the possible exercise of the option. For example, in the case of the purchase of a call, the value of the contract at expiration will be higher when the difference between the value of the unerlying and the strike is bigger. If at expiration the value of the underlying is lower than the strike, the value of the contract will be zero because the option is not excercised.