Detailed Glossary of Energy Trading terms

The value of options varies with time, in general the uncertainty in the price of the underlier reduces as the moment of exercise approaches. Theta is the measure of how much the value of a trade, or set of trades, varies with time

Detail

Theta is one of the Greeks that measure sensitivity of the value of a trade or portfolio to the passage of time

Like most Greeks, except Delta, it is zero for linear trades (trades with no optionality)

The unhelpful sounding physics definition: Energy is the capacity of a physical system to perform work

We know energy: light, heat, electricity, kinetic (motional) energy, potential (the energy something gets when we lift it up) energy etc.

Detail

The initial definition is actually more helpful than it might first appear

In general we are more interested in what energy transitions can do for us than the energy itself

For example electricity is a form of energy - but we are interested in what it can do for us - we can use it to generate heat, run washing machines, pumps etc.

Energy commodities that are themselves not energy contain chemical energy that may be released when we burn them:

• Gas can be burnt for heat, and to generate electricity
• Coal can be burnt for heat, and to generate electricity
• Oil can be burned for heat, and in automobiles and trucks for locomotion

Energy = force x distance

Energy = power x time (or power = energy per unit time)

Physicists measure energy in:

• Ergs (cgs system, one dyne force acting over one centimetre)
• Joules (SI unit, one Newton force acting over one metre)

Traders measure energy (most frequently) in

• Megawatt hours (one megawatt flowing for one hour)
• Therms (one therm = 100,000 British Thermal Units (BTUs))

Gas, oil and coal all contain carbon - when they burn the carbon is oxidized to carbon dioxide.

Carbon dioxide, as we all know, enters the atmosphere, and is generally believed to cause global warming

There are various schemes to reduce the emission of carbon dioxide, called emissions schemes, and these require major emitters of carbon dioxide to provide certificates matching their emission of carbon dioxide. These certificates may be acquired in a number of ways, and there is a market for organizations with surplus certificates to sell, and organizations who need more certificates, to buy

Detail

Naturally wherever a market exists to trade anything, speculators attempt to profit by buying and selling - in this case - carbon (in the form of certificates)

A record of all financial transactions made by the company

Detail

Usually represented by computer software the general ledger is a record of all transactions made by the company

In the trading context transactions occur when any event occurs that may cause a transaction:

• A trade is executed
• A trade is revalued
• A trade delivers
• An invoice is raised or received
• A cash payment is made or received

Transactions are represented, in double entry book keeping, as debits on one or more accounts and credits on one or more account - the debits always matching the credits for a specific transaction

Being able to assign p&l and cash flow events to general ledger accounts is a critical part of any end to end trading system

A fee is a cash payment which may be associated with:

• A single trade
• A group of trades
• No specific trades

Detail

Fees are usually cash payments that are not directly related to delivery of a commodity

There are four general categories of fees:

• Broker and clearing fees - fees associated with the execution of each trade - these can normally be booked directly against each trade as the ay are incurred
• Trade services fees - fees generally associated with the delivery of physically shipped commodities like coal and oil - again normally booked against individual trades as they are incurred
• Non-trade specific fees - cash costs which are incurred as a result of trading - but cannot be allocated to specific trades - for example imbalance costs
• Non-trade fees - cash costs associated with licences, membership costs etc. 

Fees booked against trades are generally associated with a cash flow type, so that they can be correctly allocated in P&L, invoicing and general ledger accounting

To offset the delta of an option or other non-linear trade, usually with a linear derivatives position

Detail

If we buy a simple call option, or sell a simple put option, then we may or may not have a long position when the delivery date of the (potentially exercised) contract is made

In reality the option will either get exercised or not - let's say the option is for the delivery of 1,000 MT of coal in January 2016 at ARA (Amsterdam Rotterdam Antwerp location) - we will either have a position of 1,000 MT at that time, or not

On any particular day the option will have a calculable delta, which roughly translates into a probability of the option being exercised:

An option with a delta of 0.01 has a 1% chance of being exercised

An option with a delta of 0.5 has about a 50% chance of being exercised

Traders generally hedge the exposure of the option (which is the delta times the volume), so if the delta is 0.5 they will hedge 500 MT of coal

In general as the option exercise time approaches the delta of the option will swing quite rapidly toward 0 or 1 (or -1) so that the hedge swings toward 1,000 Mt or 0 MT

If you're wondering why an option with a delta of 0.5 (meaning the value of each MT changes by €0.5 for each change in €1 per MT in the value of coal) has a 50% chance of being exercised then think the other way round - if the option was certain to be exercised then its value would change by €1 per MT per change of €1 per MT in the price of coal, so its delta would be one - the delta is effectively the probability of being exercised

Auto Trade Capture is a capability in most trading organizations (and many have an application called ATC) that allows trades executed on an electronic trading platform (usually exchange or broker) to be automatically downloaded to our organization's ETRM

Detail

ATC usually works by accessing an Instance of Trayport GlobalVision which is a proprietary product.

Trayport provide broker trading platforms to most common Energy Trading Brokers and some Exchanges, and also acts as an interface to many Exchanges running their own trading platforms

Trades executed on compatible platforms may be accessed as XML and mapped into the local ETRM

It is normal for trades to be entered into the ETRM in a status that requires a trader to "validate" or "approve" the trade as having been executed

Trades may also be received from other platforms, often in the form of FIX format messages

Most ATC systems consist of:

• A set of download adapters
• A maze of mapping tables
• A set of ETRM adapters

Origination - the negotiation and conclusion of bespoke contracts, and structuring of non-standard products to offer for sale

Detail

Origination teams and originators in energy trading organizations are about putting together large integrated contracts, outside standard master agreements. These might involve:

Structured long-term procurement deals particularly for oil and gas

Virtual Assets - Virtual storage, virtual power plants, virtual refining

Complex hedging products

A type of Futures contract that is physically delivered and settled at the exchange closing price of the contract

Detail

Traders make bids on an Exchange for a TAS contract, specifying volume and price offset, the Exchange matches bids and offers in the usual way

For example a trader may bid to buy 1,000 barrels of crude oil at the settlement price minus 3 cents, if another trader offers to sell that volume at that price then the exchange matches the orders and a TAS futures contract is executed at the settlement price less 3 cents

A TAS futures contract is similar to an indexed forward

TAS contracts are frequently used in oil futures

See also Trading at Market  

A type of Forward contract that is physically delivered and settled at a price derived from a published index

Detail

See Forward contract