Hi! Welcome to this week’s Two-Minute Tuesday where we’re going to be talking about strike prices and fixed price triggers. We’ll be answering some questions about what those are and when someone might use them.
Strike Price vs. Price Trigger
A strike price is more of a technical investment term. When you’re looking at purchasing natural gas and electricity, we’re most likely talking about a price trigger.
A price trigger is when a client authorizes a set market price that the market might go down to, at which point a transaction might be automatically executed or approved to be executed.
When should you use a price trigger?
Here are a few situations where that might be used.
1) Slower Decision Making/Authorization Process
The first is when you have a slower decision making or authorization process. Good examples of this are school boards or condominium associations where they need to have a group vote in order to approve a transaction.
Obviously this isn’t very conducive with market volatility and moving quickly on a price. So what they might do is approve a price trigger and a specific target to be executed in the near future. In this situation, it would be automatically executed based on that target price, so they don’t have to go back and get additional approvals.
2) Multiple transactions
Another situation where someone might use this is a large user who is making multiple transactions. Think of a data center or a large manufacturer for whom energy is a significant cost in the price of their product.
In this case, they’re making many transactions over time, and they want to streamline that process so they can execute more quickly based on market volatility. In this scenario, they may or may not execute automatically.
Often, there’s a buyer or someone in place who can make those decisions, and what they really want is to be notified when the price hits that level so they can give a quick yes or no and then the transaction would occur. But the transaction wouldn’t be slowed down by paperwork or needing to get things signed right at that moment; it’s all been done in advance with the price trigger.
3) Market Monitoring
The third scenario is for market monitoring purposes. We use this often when we’ve got a client with a contract that’s up at the end of the year, and maybe we’re looking to see if the market drops below the current price for a client and we want to take advantage of that.
So in that situation, there wouldn’t be an automatic execution, but that price trigger would set off a notification to let us know where the market’s at so we can look at it and bring it to a client for evaluation and then to potentially make a decision on that.
So those are three different scenarios with three slightly different outcomes on a price trigger. But the core point is setting and approving a target price at which some transaction or notification is going to be exercised in the future.
If you think price triggers might be a good fit for you or if you just have general questions, reach out to your energy advisor for further details.
As always, thanks for watching, and please comment, like, or share below!