Swing Option

When you get to the party, everybody's going to put their car keys into the empty fish bowl. At the end of the evening...

Er, okay. In the finance world, it represents a certain type of futures contract in the energy sector.

Most futures contracts come with fairly specific parameters. You buy a contract for 100 barrels of oil with a strike price of $70 a barrel, with delivery set for August.

A swing option gives more leeway. The buyer has some degree of choice about both the amount of energy delivered and the time it gets delivered.

The option stipulates a range for the amount of product that should be delivered. It gives a high and low amount. The deal also exists over a period of time (rather than being executed on a single set day in the future). So a buyer can choose to take some amount each day or each month. The amounts can vary (or swing) depending on the recipient's need.

Meanwhile, the strike price for the option is set. Both sides know what the per-unit cost will be. The contract allows buyers to lock in a price, while providing some flexibility about how much they will receive, allowing them to react to spikes and lags in demand.