Low-Cost Options ‘Collar’ Would Cut CO2 Risks, Jefferies Says

Power stations, factories and airlines concerned that volatile carbon prices may boost their compliance costs can use a low-cost options strategy to cut price risks, said Jefferies Bache Ltd.

Emitters could buy a December call option at a strike price of about 11 euros ($14.54) a ton and sell a put option at a strike of about 7 euros, said Andrew Ager, head of carbon in London at the unit of Jefferies Group Inc. (JEF) In the so-called collar, the price of the call at 1.25 euros a ton would almost offset the revenue from selling the put at 1.10 euros, based on data yesterday from ICE Futures Europe in London.

“At the moment we’re going through an exceptionally volatile time,” Ager said today by phone. “Putting on a zero- cost collar can bring peace of mind.”

EU allowances advanced 17 percent last week to 9.27 euros a metric ton on speculation that policy makers will act to curb excess supply after political parties in the European Parliament committee on industry agreed to ask the bloc’s regulator to propose setting aside, or withholding, some permits. UBS AG said yesterday prices may fall to 3 euros, potentially around April, because tightening the market will probably take years rather than months.

“Although we still believe some EU emissions trading system participants are misguided about the timeliness surrounding the supply recalibration proposals, upside price risk is still substantial as the market gets trigger happy every time it hears the words set-aside,” Matthew Gray, an analyst for Jefferies Bache in London, said yesterday in a research note.

Protection, Risk

EU carbon for December rose 3.8 percent today to 9.10 euros on ICE as of 3:34 p.m.

Call options give the buyer the right to purchase at a set level. Put options give the buyer the right to sell at a certain price. Buying the call option offers protection if prices jump beyond that level, Ager said.

The collar strategy is not without risk, he said. Should prices drop fast, then the value of the sold put option can surge. Yesterday, the price of the put with a 7 euro strike jumped 8.9 percent as December futures declined 5.4 percent, according to the ICE data.

Still, the collar strategy allows the compliance buyer to benefit from some downside, while protecting against another surge, Ager said.

To contact the reporter on this story: Mathew Carr in London at m.carr@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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