An option that gives the buyer (holder) the right, but not the obligation, to buy an underlying asset (often a futures contract, that is, enter into a long futures position) or physical commodity for a specified price within a specified period of time in exchange for a one-time premium payment.
It obligates the seller (writer) of the option to sell the underlying asset/futures contract (enter into a short futures position) or commodity at the designated price, should the option be exercised at that price.
* see also put option
Commodity trading and risk management is a subject that is necessarily complicated, and is becoming more so. The Energy Risk Glossary seeks to disentangle and clarify the jargon by providing definitions of commonly used energy and commodity market terms.
These include definitions related to a variety of underlying energy products, as well as technical terms about the many instruments and benchmarks used by energy market participants.
Many of the most recent terms to have been added to our glossary stem from the actions of regulators since the 2008 global financial crisis. The onset of rules, such as the US Dodd-Frank Act and European Market Infrastructure Regulation, has markedly increased the cost and complexity associated with commodity trading. Perhaps they have also increased the need for a handy reference guide such as this.
The glossary is extensively cross-referenced, making for easy and thorough searches. We hope you find the latest edition of the Energy Risk Glossary to be a useful resource.
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