Spread Options and Virtual Storage

Ilia Bouchouev
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Ilia Bouchouev: Pentathlon Investments, LLC

Chapter 13 in Virtual Barrels, 2023, pp 281-303 from Springer

Abstract: Abstract We present a trading strategy based on the idea of virtual storage. The physical storage asset is replicated with a financial derivative, a calendar spread option, and the structural pricing dislocation between the physical and financial market is exploited. Other spread option and correlation strategies are based on the concept of a triangular arbitrage, which links prices of vanilla and spread options. We emphasize some flaws of correlation-based models and argue for a closer connection to fundamentals in modeling volatility of energy spreads.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sptchp:978-3-031-36151-7_13

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DOI: 10.1007/978-3-031-36151-7_13

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