Swing Option

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.

BREAKING DOWN '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. Options Contract

    A contract that allows the holder to buy or sell an underlying ...
  2. Call Option

    An agreement that gives an investor the right (but not the obligation) ...
  3. Stock Option

    A privilege, sold by one party to another, that gives the buyer ...
  4. Options On Futures

    An option on a futures contract gives the holder the right to ...
  5. Exchange-Traded Option

    An option traded on a regulated exchange where the terms of each ...
  6. Basket Option

    A type of financial derivative where the underlying asset is ...
Related Articles
  1. Trading

    Examples Of Exchange-Traded Derivatives

    We look at some of the most common exchange-traded derivatives.
  2. Trading

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
  3. Investing

    Options on Futures

    Options on futures contracts offer another way for day traders to use options. These are traded on the same exchange as the underlying futures contract. Traders should take care to understand ...
  4. Trading

    Options Pricing: A Review Of Basic Terms

    The following is intended as a review of basic option terminology, which can be used as a reference as needed: American Options - An option that can be at any point during the life of the contract. ...
  5. Investing

    Types of Options

    There are many different types of options. In addition to general put options and call option, we will discuss 13 different types of options. Some of these option types are better suited to day ...
  6. Trading

    Introduction - Day Trading and Options

    Options have not been a tradition part of day-trading strategy, but this is quickly changing.
  7. Investing

    Exploring The World Of Exotic Options

    Exotic options provide investors with new alternatives to manage their portfolio risks and speculate on various market opportunities. The pricing for such instruments is considerably complex, ...
  8. Trading

    Options Basics: How Options Work

    Now that you know the basics of options, here is an example of how they work. We'll use a fictional firm called Cory's Tequila Company.
  9. Markets

    How to Trade Options on Government Bonds

    A look at trading options on debt instruments, like U.S. Treasury bonds and other government securities.
  10. Trading

    Three Ways to Profit Using Put Options

    A brief overview of how to profit from using put options in your portfolio.
RELATED FAQS
  1. How do speculators profit from options?

    As a quick summary, options are financial derivatives that give their holders the right to buy or sell a specific asset by ... Read Answer >>
  2. When is a put option considered to be "in the money"?

    Learn about put options, what they are, how these financial derivatives operate and when put options are considered to be ... Read Answer >>
  3. Does the seller (the writer) of an option determine the details of the option contract?

    The quick answer is yes and no. It all depends on where the option is traded. An option contract is an agreement between ... Read Answer >>
  4. What is the difference between open interest and volume?

    Learn more about options, what options' volume and open interest are and the difference between volume and open interest ... Read Answer >>
  5. How do I measure option liquidity?

    An option is a financial instrument that gives the holder the right to purchase shares in a company at a certain set price ... Read Answer >>
  6. What does the underlying of a derivative refer to?

    Find out more about derivative securities, what an underlying asset is and what the underlying assets refer to in stock options ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center