They are less liquid; electricity markets and electric utilities must follow different rules in every state; and the underlying commodity, electricity, cannot be stored.
The value of that contract is dependent on--or derived from--the price of the underlying commodity, in this case electricity.
Options require less initial cash outlay than buying the underlying futures contract would, but they can be much more volatile.
Anyone can speculate in oil or gas, store the underlying commodity and sell it at a more auspicious time.
Although the derivatives themselves are not regulated, the Federal Energy Regulatory Commission monitors underlying transactions that involve actual power delivery, such as those traded on the California Power Exchange (CalPx) a market California devised for trading electricity in-state when it began deregulating.
If the hedge goes in the money and the underlying commodity [goes] dear, you look great," Lifson says.
call (option) A call allows an investor to buy a futures contract or other underlying commodity at a specific price for a limited time.
derivative A financial instrument that is contingent on the price of an underlying commodity, in this context, electricity.
embedded derivative A derivative implied by a contract such as a bond, insurance policy or lease that is contingent on an underlying commodity but is not itself a derivative.
long An investment is long if the investor makes money when its price or the price of an underlying commodity rises.
put (option) In this context, an agreement allowing an investor to sell a futures contract or other underlying commodity at a specific price for a limited time.