Carbon’s Coronavirus Plunge in Europe Stoked by Options Trade

(Bloomberg) -- One of the biggest selloffs in the history of Europe’s carbon emissions market stoked record trading in futures and put options as the economic impact of the coronavirus worsened.

As futures crashed through once-remote option strike prices, investors who’d previously sold puts needed to lay off the risk by selling futures. As prices kept falling, managing the hedge would typically involve selling more futures, and steepening what turned out to be the biggest three-day rout in the market for seven years.

“Selling the past few days may have been partly related to traders hedging open positions in sold put options, with many strike prices now in the money,” Ingo Ramming, head of corporate and investor solutions at Commerzbank AG in Frankfurt, who’s tracked the EU market for more than a decade. “It’s unclear how long the coronavirus pandemic is going to cut demand for energy and related commodities, including carbon allowances.”

As futures fell below 24 euros ($26) a ton last week, previously out-of-the-money short-dated options to sell carbon permits at 22 euros and 20 euros became increasingly valuable. Those two strike prices have open interest of more than 9 million tons each, or about a third of the daily 100-day average in the futures market. March options expire on March 25.

• Put options trade was the highest ever on ICE, the main exchange for the Europe’s carbon market:

The plunge in market prices meant the U.K. government’s revenue from its auction of carbon allowances was 92 million euros, 31% less than two weeks earlier.

While carbon prices stopped falling on Thursday, the permits are still down 36% over the past five days and traded at about 15.49 euros in London. It still has room to fall and could soon go below 10 euros per ton, according to Nicolas Girod, a managing director at ClearBlue Markets, which advises industrial and utility companies on carbon markets.

“It’s a panic mode,” Girod said in a phone interview. “The fundamentals don’t mean anything anymore.”

©2020 Bloomberg L.P.