Glossary of Terms

The terminology for energy trading and hedging can send your head spinning! Here’s a listing of what some of the most common words associated with hedging and Cap programs.

ATM – (At The Money) An option purchased at a strike price that matches the current market price

Basis Risk – The risk resulting from the gap between the spot market and market futures prices

Call Option – Protects from upward market movement by providing payout for market levels above a specified strike price

Collar – Sets a guaranteed range of market participation, capping the upside but limiting the downside with a put and call option mix. More economical than a CAP strategy, but more restrictive to downward participation.

Future – A contract for future purchase or sale of a contract tied to a physical commodity

ITM – (In The Money) A Call Option with a strike price lower than the current market price, or a Put Option with a strike price higher than the current market price

Long – A market position where the number of contracts bought is greater than the number of contracts sold

Option – Options give buyers and sellers the right, but not obligation, to buy or sell at a specified price in a given time period.

OTM – (Out of The Money) A Call Option with a strike price higher than the current market price, or a Put Option with a strike price lower than the current market price

Premium – The expense for an options contract

Put Option – Protects from downward market movement by providing payout for market levels below a specified strike price

Short – A market position where the number of contracts sold is greater than the number of contracts bought

Spread – The difference between the bid and ask price of a market position

Straddle – To buy or sell an equal number of Put or Call Options at the same time, with the same terms

Strangle – To buy or sell an OTM Put Option and OTM Call Option to expire on the same date

Strike – The specified price that an option’s transaction is based off of if exercised

Swap – An arrangement where two parties lend to each other on different terms, such as currencies or interest rates

VAR – (Value At Risk) A valuation of probability for losses based on historical and statistical market information

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