A Comparative Analysis of Momentum and Volatility-Based Strategies on Italian Electricity Derivatives

This thesis compares Trend Following strategies and theoretical Long Straddle positions in the Italian electricity derivatives market. Both strategies exhibit option-like payoff structures with positive skewness but diverge systematically across market regimes. Trend Following delivers superior risk-adjusted returns with substantially lower volatility than the Long Straddle. A performance crossover emerges based on move size: Trend Following dominates during small to moderate price changes through systematic risk management, while the straddle outperforms during extreme moves through nonlinear convexity. The decisive factor is the Volatility Risk Premium. When implied volatility exceeds realized volatility, which occurs in the majority of observations, Trend Following signi cantly out performs by avoiding the cost of overpriced options. Conversely, during rare periods when options are underpriced relative to subsequent volatility, straddles generate substantially higher returns. The thesis establishes that in illiquid derivatives markets with persistent Volatility Risk Premiums, Trend Following represents a practical, implementable proxy for convexity exposure when direct option strategies face severe execution constraints.