 Option Returns, Risk Premiums, and Demand Pressure in Energy MarketsKris Jacobs and Bingxin Li Journal of Banking & Finance, 2023, vol. 146, issue C Abstract: We study energy futures option returns for crude oil, natural gas, heating oil, and gasoline. Average call and put returns are negative at short maturities, more so for OTM options, and increase with maturity. Put returns are less negative than call returns, but this is not the case for delta-hedged returns, indicating that the aggregate risk of the underlying energy futures is priced in the raw option returns. Moneyness patterns in raw and delta-hedged returns are similar to patterns for index option returns. Significant differences between the four commodities remain after removing the effect of the underlying futures returns, with natural gas as the main outlier. Variance risk premiums are negative and explain some maturity patterns in returns, but they cannot account for return differences across markets. Energy producers are net short the underlying through their option positions, and speculators net long. The larger the net long position of the speculators, the lower the returns on call options, which suggests that demand from speculators may affect option returns in energy markets. Keywords: Futures Option Returns; Energy; Commodities; Variance Risk Premiums; Demand Pressure (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:146:y:2023:i:c:s0378426622002679 DOI: 10.1016/j.jbankfin.2022.106687 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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