Swing Option

AAA

DEFINITION of 'Swing Option'

A type of contract used by investors in energy markets that lets the option holder buy a predetermined quantity of energy at a predetermined price while having some flexibility in the amount purchased and the price paid. A swing option contract states the least and most energy an option holder can buy (or "take") per day and per month, how much that energy will cost (its strike price) and how many times during the month the option holder can change (or "swing") the daily quantity of energy purchased.

INVESTOPEDIA EXPLAINS 'Swing Option'

Swing options, also called swing contracts, take-and-pay options or variable base-load factor contracts, are most commonly used for the purchase of oil, natural gas and electricity. They can be used as a hedge by the option holder to protect against price changes in these commodities.

For example, a power company might use a swing option to manage changes in customer demand for electricity that occur throughout the month as temperatures rise and fall. These contracts are more intricate than they appear to be, making their valuation challenging.

RELATED TERMS
  1. Put Option

    An option contract giving the owner the right, but not the obligation, ...
  2. Option

    A financial derivative that represents a contract sold by one ...
  3. Call Option

    An agreement that gives an investor the right (but not the obligation) ...
  4. Option Chain

    A form of quoting options prices through a list of all of the ...
  5. Strike Price

    The price at which a specific derivative contract can be exercised. ...
  6. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...
Related Articles
  1. Options & Futures

    Introduction To Put Writing

    Learn about a strategy that may be appropriate if you have a positive outlook on a stock.
  2. Options & Futures

    Cut Down Option Risk With Covered Calls

    A good place to start with options is writing these contracts against shares you already own.
  3. Options & Futures

    The Importance Of Time Value In Options Trading

    Move beyond simply buying calls and puts, and learn how to turn time-value decay into potential profits.
  4. Options & Futures

    Options Trading Strategies: Understanding Position Delta

    Learn more about the position delta hedge ratio and how it can tell you the number of contracts needed to hedge a position in the underlying asset.
  5. Options & Futures

    Options On Futures: A World Of Potential Profit

    There's one simple hurdle in the transition from stock to futures options: learning about product specifications.
  6. Options & Futures

    Do Option Sellers Have a Trading Edge?

    Take a look at a study that discovered that three out of every four options expired worthless.
  7. Options & Futures

    The ABCs Of Option Volatility

    The mystery of options pricing can often be explained by a look at implied volatility (IV).
  8. Options & Futures

    Get To Know These Crucial US Options Market Regulations

    How are options regulated in the U.S and which organizations are involved in options market regulations?
  9. Trading Strategies

    Know How To Manage Gaps On Your Trading Strategy

    Gaps generate profitable strategies right after they print, as well as during retracements that test those levels, often months or years later.
  10. Active Trading Fundamentals

    20 Rules To Trade More Professionally

    Break free from the pack and join the professional minority with an approach that raises your odds for long term prosperity.

You May Also Like

Hot Definitions
  1. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  2. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  3. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  4. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  5. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  6. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
Trading Center