American Option – An option that may be exercised anytime during the life of the option. Most exchange-traded options are American options.

Arbitrage – The simultaneous purchase of one energy commodity against the sale of another in order to profit from fluctuations in the usual price relationships. Variations include the simultaneous purchase and sale of different delivery months of the same energy commodity; of the same delivery month, but different grades of the same energy commodity; and of different commodities.

Asian Option – An option whose payoff depends on the average price of the underlying energy commodity over a certain period of time. Asian options are also referred to as average price options.

At The Money – An option is at-the-money if the strike price of the option equals the current market price of the underlying energy commodity.

Backwardation – Market situation in which futures prices are lower in each succeeding delivery month. Also known as an inverted market. The opposite of contango.

Basis – The differential that exists at any time between the cash, or spot, price of a given energy commodity and the price of the nearest futures contract for the same or a related energy commodity. Basis may reflect different time periods, product forms, qualities, or locations. Cash minus futures equals basis.

Basis Risk – The uncertainty as to whether the cash-futures spread will widen or narrow between the time a hedge position is implemented and liquidated.

Basis Swap – A type of swap that is used to mitigate exposure to basis risk. Basis swaps are often used to hedge location price risk vs. a published index value or futures contract.

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