swing option

Definition

This is an agreement to buy or sell a certain amount of a commodity, at set periodic intervals, for a guaranteed price, during the length of the agreement. For example a seller agrees with a buyer to sell 1 ton of steel every week, for 10 weeks, at $5000 per transaction (regardless of the real market price at the time). The "swing" refers to the purchase or sale occurring at each periodic interval. Penalties are imposed if either the buyer or seller fails to make the agreed purchase / sale at the agreed price and schedule.
This method is most commonly used in energy trading.

Related Terms

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swing loan Bermuda option