July 24, 2017

Investment & Trading Terms

Basis– The price differential between a particular market and a pricing or benchmark location.

Basis Point– Risk associated with the value of one instrument that may not move up or down in equal proportion with the value of another instrument, usually a hedge.

Bear– When market condition sour, it’s called a bear market, and if you’re a bear you assume that prices are going to decline.

Bull– In a bull market, prices are rising and are very active.

Call Option– Agreed-upon price, known as a Strike Price, by a certain date. Buying a call option gives the holder the right to buy the asset at a given price in the future, when the asset might command a higher price in the market. Selling a call option obligates the seller, at the buyer’s discretion, to sell the asset at the strike price in the future, even though the market price may be higher than the strike price. A call option is the opposite of a Put Option.

Cap– In financial terms, a cap is the highest interest that can be charged. In the energy field, a cap may be a hedge to protect against unforeseen commodity price increases.

Commodity– Something that can be bought and sold reasily and in very large quantity, like wheat, natural gas, or electricity.

Hedge– The process of reducing financial risk, which includes the purchase and sale of futures contracts and other derivatives. For example, if a company sells gas for delivery in a future month, it can purchase futures contracts for that month to protect itself in case prices decline between now and the time of delivery.

Hub– A pipeline interchange used as a standard delivery point for figuring natural gas futures contracts. There are four: the Henry Hub in Southern Louisiana, the Katy Hub near Houston, the Waha Hub in west Texas, and the Midwest Exchange Hub near Chicago.

Long– You’re “long” on a commodity if you bought it anticipating its market price will go up. If you’re right, you’re “in the money.” But if prices go down, you could be dead broke.

Put Option– The right–but not the obligation–to sell a specific asset or commodity at an agreed-upon price, known as the strike price, by a certain date. The buy assumes the price of the commodity will fall before he expiration of the option. If the prices does not fall, the buyer loses the cost of the put option. A put option is the opposite of a call option.

Short– You’re “short” if you sell something at a rpice you believe will fall by the time you must buy it to satisfy your original contract. If you’re right, you make a lot of money.

Spark Spread– The difference between the price at which electricity is sold and the cost of the fuel used to generate it.

*This glossary of Energy Trading Terms has been provided to you by Aquila.