GLOSSARY
ACCOUNT EXECUTIVE
The agent of a commission house who serves customers/traders by
entering their commodity futures and options orders, reporting trade
executions, advising on trading strategies, etc.
ACTUALS
Physical cash commodities as opposed to futures contracts.
ADP
Alternative Delivery Procedure. A provision of a futures contract
that allows buyers and sellers to make and take delivery under
terms or conditions that differ from those prescribed in the
contract. An ADP may occur at any time during the delivery
period, once long and short futures positions have been matched
for the purpose of delivery.
ALL OR NONE
An order which must be filled in its entirety or not at all.
ARBITRAGE
The simultaneous purchase of one 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 commodity; of the
same delivery month, but different grades of the same
commodity; and of different commodities.
ASK
A motion to sell. The same as offer.
ASSIGNMENT
The process by which the seller of an option is notified of a
buyer's intention to exercise the rights associated with the option.
ATTHEMARKET
An order to buy or sell a futures contract at whatever price is
obtainable when the order reaches the trading floor. Also called a
market order.
ATTHEMONEY
An option whose exercise, or strike, price is closest to the futures
price.
AUTOMATIC EXERCISE
Following options expiration, an option which is inthemoney by
$100 or more is exercised automatically by the clearing house,
unless the holder of the option submits specific instructions to the
contrary.
BACKWARDATION
Market situation in which futures prices are lower in each
succeeding delivery month. Also known as an inverted market.
The opposite of contango.
BANKER'S ACCEPTANCE
A draft or bill of exchange accepted by a bank; payment is
guaranteed by the accepting institution.
BASIS
The differential that exists at any time between the cash, or spot
price of a given commodity and the price of the nearest futures
contract for the same or a related 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.
BEAR
One who anticipates a decline in price or volatility. Opposite of a
bull.
BEAR MARKET
Market in which prices are in a declining trend.
BEAR SPREAD
1) The simultaneous purchase and sale of two futures contracts
in the same or related commodities with the intention of profiting
from a decline in prices, but at the same time limiting the potential
loss if this expectation is wrong. This can usually be accomplished
by selling a nearby delivery and buying a deferred delivery. 2) A
deltanegative option position comprised of long and short
options of the same type, either calls or puts, designed to be
profitable in a declining market. An option with a lower strike price
is sold and one with a higher strike price is bought.
BID
A motion to buy a futures or option contract at a specified price.
Opposite of offer.
BOOK TRANSFER
Transfer of title without actually delivering the product.
BRAND
Insignia identifying the producer of a specific commodity.
BREAK
A rapid and sharp price decline.
BREAKEVEN POINT
The underlying futures price at which a given options strategy is
neither profitable nor unprofitable. For call options, it is the strike
price plus the premium. For put options, it is the strike price minus
the premium.
BROKER
1) An individual who is paid a fee or commission for acting as an
agent in making contracts, sales, or purchases. 2) A floor broker
is a person who actually executes trading orders on the floor of
an exchange. 3) An account executive, registered commodity
representative, or customers' man who deals with customers and
their orders in commission house offices. See also Futures
Commission Merchant.
BULGE
A rapid advance in futures prices.
BULL
One who anticipates an increase in price or volatility. Opposite of
a bear.
BULL MARKET
Market in which prices are in an upward trend.
BULL SPREAD
1) The simultaneous purchase and sale of two futures contracts
in the same or related commodities with the intention of profiting
from a rise in prices but at the same time limiting the potential
loss if this expectation is wrong. This can be accomplished by
buying the nearby delivery and selling the deferred. 2) A
deltapositive options position composed of both long and short
options of the same type, either calls or puts, designed to be
profitable in a rising market. An option with a lower strike price is
bought and one with a higher strike price is sold.
BUYER'S MARKET
A condition of the market in which there is an abundance of
goods available and hence buyers can afford to be selective and
may be able to buy at less than the price that had previously
prevailed. See seller's market.
BUYING HEDGE
Also called a long hedge. Buying futures contracts to protect
against possible increased costs of commodities that will be
needed in the future.
CALENDAR SPREAD
An options position comprised of the purchase and sale of two
options contracts of the same type that have the same strike
prices but different expiration dates. Also known as a horizontal,
or time, spread.
CALL OPTION
An option that gives the buyer (holder) the right, but not the
obligation, to buy a futures contract (enter into a long futures
position) for a specified price within a specified period of time in
exchange for a onetime premium payment. It obligates the seller
(writer) of an option to sell the underlying futures contract (enter
into a short futures position) at the designated price, should the
option be exercised at that price.
CAP
A supply contract between a buyer and a seller, whereby the
buyer is assured that he will not have to pay more than a given
maximum price. This type of contract is analogous to a call
option.
CARRYING CHARGE
The total cost of storing a physical commodity over a period of
time. Includes storage charges, insurance, interest, and
opportunity costs.
CASH COMMODITY
The actual physical commodity. Sometimes called a spot
commodity or actuals.
CASH MARKET
The market for a cash commodity where the actual physical
product is traded.
CFTC
See Commodity Futures Trading Commission.
CHARTING
The use of graphs and charts in the analysis of market behavior,
so as to plot trends of price movements, average movements of
price, volume, and open interest, in the hope that such graphs
and charts will help one to anticipate and profit from price trends.
Contrasts with fundamental analysis.
CIF
Cost, Insurance, Freight. Term refers to a sale in which the buyer
agrees to pay a unit price that includes the free on board (FOB)
Value at the port of origin plus all costs of insurance and
transportation. This type of transaction differs from a "delivered"
agreement in that it is generally exduty, and the buyer accepts
the quantity and quality at the loading port rather than pay on
quality and quantity as determined at the unloading port. Risk and
title are transferred from the seller to the buyer at the loading
port, although the seller is obliged to provide insurance in a
transferable policy at the time of loading.
CLASS OF OPTIONS
All call options, or all put options, exercisable for the same
underlying futures contract and which expire on the same
expiration date.
CLEARING MEMBER
Clearing members of the New York Mercantile Exchange accept
responsibility for all trades cleared through them, and share
secondary responsibility for the liquidity of the Exchange's clearing
operation. They earn commissions for clearing their customers'
trades, and enjoy special margin privileges. Original margin
requirements for clearing members are lower than for customers,
and clearing members may use letters of credit posted with the
clearinghouse as original margin for customer accounts as well as
for their own trades. Clearing Members must meet a minimum
capital requirement.
CLEARINGHOUSE
An Exchangeassociated body charged with the function of
insuring the financial integrity of each trade. Orders are "cleared"
by means of the clearinghouse acting as the buyer to all sellers
and the seller to all buyers.
CLOSING RANGE
A range of prices at which transactions took place at the closing
of the market; buying and selling orders during the closing period
might have been filled at any point within such a range.
COMMISSION
The fee charged by a futures broker for the execution of an order.
COMMISSION HOUSE
An organization that trades commodities and/or futures and
options contracts for customer accounts in return for a fee.
COMMISSION MERCHANT
One who makes a trade, either for another member of an
exchange or for a nonmember client, but who makes the trade in
his own name and becomes liable as principal to the other.
COMMITMENT OR OPEN INTEREST
The number of open or outstanding contracts for which an
individual or entity is obligated to the Exchange because that
individual or entity has not yet made an offsetting sale or
purchase, an actual contract delivery, or, in the case of options,
exercised the option
COMMODITY
As defined by the CFTC, specifically enumerated agricultural
commodities, all other goods and articles, except onions, and all
services, rights, and interests in which contracts for future
delivery are presently, or in the future may be, dealt.
COMMODITY FUTURES TRADING COMMISSION
A federal regulatory agency authorized under the Commodity
Futures Trading Commission Act of 1974 to regulate futures
trading in all commodities. The commission is comprised of five
commissioners, one of whom is designated as chairman, all
appointed by the President, subject to Senate confirmation. The
CFTC is independent of the Cabinet departments.
COMMODITY POOL
A venture, usually a limited partnership, in which funds contributed
by a number of investors are combined for the purpose of trading
futures. Also called a commodity fund or a futures fund.
COMMODITY POOL OPERATOR (CPO)
Acts as a general partner of commodity pools. CPOs may hire
independent Commodity Trade Advisors to handle daily trading
decisions. Responsible for the pool's administration, structure, and
selecting and monitoring the traders who conduct transactions
using the fund's money.
COMMODITY TRADING ADVISOR (CTA)
A person who, for compensation or profit, directly or indirectly
advises others as to the advisability of buying or selling futures
or commodity options.
CONTANGO MARKET
A market situation in which prices are higher in the succeeding
delivery months than in the nearest delivery month. Opposite of
backwardation.
CONTINGENCY ORDER
An order which becomes effective only upon the fulfillment of
some condition in the marketplace.
CONTRACT
1) A term of reference describing a unit of trading for a
commodity future or option. 2) An agreement to buy or sell a
specified commodity, detailing the amount and grade of the
product and the date on which the contract will mature and
become deliverable.
CONTRACT GRADE
That grade of product established in the rules of a commodity
futures exchange as being suitable for delivery against a futures
contract.
CONTRACT MONTHS
See delivery month.
CONTRACT TRADING VOLUME
Daily trading volume.
CONVERSION
A deltaneutral arbitrage transaction involving a long futures
contract, a long put option, and a short call option. The put and
call options have the same strike price and same expiration date.
COVER
To close out a short futures or options position.
COVERED WRITING
The sale of an option against an existing position in the underlying
futures contract. For example, short call and long futures.
CURRENT DELIVERY MONTH
The futures contract which matures and becomes deliverable
during the present month or the month closest to delivery. Also
called the spot month.
DAY TRADE
The purchase and sale of a futures or an options contract on the
same day.
DELIVERY
The term has distinct meaning when used in connection with
futures contracts. Delivery generally refers to the changing of
ownership or control of a commodity under specific terms and
procedures established by the exchange upon which the contract
is traded. Typically, except for energy, the commodity must be
placed in an approved warehouse, precious metals depository, or
other storage facility, and be inspected by approved personnel,
after which the facility issues a warehouse receipt, shipping
certificate, demand certificate, or due bill, which becomes a
transferable delivery instrument. Delivery of the instrument
usually is preceded by a notice of intention to deliver. After receipt
of the delivery instrument, the new owner typically can take
possession of the physical commodity, can deliver the delivery
instrument into the futures market in satisfaction of a short
position, or can sell the delivery instrument to another market
participant who can use it for delivery into the futures market in
satisfaction of his short position or for cash, or can take delivery
of the physical himself. The procedure differs for energy contracts.
Bona fide buyers or sellers of the underlying energy commodity can
stand for delivery. If a buyer or seller stands for delivery, the contract is
held through the termination of trading. The buyer and seller each file a notice
of intent to make or take delivery with their respective clearing
members who file them with the Exchange. Buyers and sellers are
randomly matched by the Exchange. The delivery payment is
based on the contract's final settlement price.
DELIVERY MONTH
The month specified in a given futures contract for delivery of the
actual physical spot or cash commodity.
DELIVERY NOTICE
A notice presented through an exchange's clearing house by a
clearing member announcing the intention to deliver the actual
commodity in satisfaction of a contract obligation.
DELIVERY POINT(S)
Location(s) designated by an exchange at which delivery may be
made in fulfillment of contract terms.
DELTA
The sensitivity of an option's value to a change in the price of the
underlying futures contract. also referred to as an option's
futuresequivalent position. Deltas are positive for bullish options
positions, or calls, and negative for bearish options positions, or
puts. Deltas of deep inthemoney options are approximately
equal to one; deltas of atthemoney options are 0.5; and deltas
of deep outofthemoney options approach zero.
DELTA NEUTRAL SPREAD
A spread where the total delta position on the long side and the
total delta on the short side add up to approximately zero.
DEPOSITORY OR WAREHOUSE RECEIPT
A document issued by a bank or warehouse indicating ownership
of a commodity stored in a bank depository or warehouse. In the
case of many commodities deliverable against futures contracts,
transfer of ownership of an appropriate depository receipt may
effect contract delivery.
DERIVATIVE
Financial instrument derived from a cash market commodity,
futures contract, or other financial instrument. Derivatives can be
traded on regulated exchange markets or overthecounter. For
example, futures contracts are derivatives of physical
commodities, options on futures are derivatives of futures
contracts.
DIFFERENTIALS
Price differences between classes, grades, and locations of
different stocks of the same commodity.
DISCOUNT
1) A downward adjustment in price allowed for delivery of stocks
of a commodity of lesser than contract grade against a futures
contract. 2) Sometimes used to refer to the price differences
between futures of different delivery months.
DISCRETIONARY ACCOUNT
An arrangement by which the holder of an account gives written
power of attorney to someone else, often a broker, to buy and
sell without prior approval of the account holder. Often referred to
as a "managed account."
ELECTRONIC TRADER
A person who is authorized to enter orders for his own account
and/or for customers' accounts on the NYMEX ACCESS electronic
trading system.
EXCHANGE CERTIFIED STOCKS
Stocks of commodities held in depositories or warehouses
certified by an Exchangeapproved inspection authority as
constituting good delivery against a futures contract position.
Current total certified stocks are reported in the press for many
important commodities such as platinum.
EXCHANGE OF FUTURES FOR CASH
A transaction in which the buyer of a cash commodity transfers
to the seller a corresponding amount of long futures contracts, or
receives from the seller a corresponding amount of short futures,
at a price difference mutually agreed upon. In this way, the
opposite hedges in futures of both parties are closed out
simultaneously.
EXCHANGE OF FUTURES FOR PHYSICALS
A futures contract provision involving an agreement for delivery of
physical product that does not necessarily conform to contract
specifications in all terms from one market participant to another
and a concomitant assumption of equal and opposite futures
positions by the same participants at the time of the agreement.
EXERCISE
The process of converting an options contract into a futures
position.
EXERCISE PRICE
The price at which the underlying futures contract will be bought
or sold in the event an option is exercised. Also called the strike
price.
EXPIRATION DATE
The date and time after which trading in an options contracts
terminates, and after which all contract rights or obligations
become null and void.
EXTRINSIC VALUE
The amount by which the premium exceeds its intrinsic value.
Also known as time value.
FAIR VALUE
Theoretical value.
FAST MARKET
Transactions in the pit or ring that take place in such volume and
with such rapidity that price reporters are behind with price
quotations, so they insert "Fast" and show a range of prices.
FENCE
A long (short) underlying position together with a long (short)
outofthemoney put and a short (long) outofthemoney call.
All options must expire at the same time.
FIA
Futures Industry Association. A national not forprofit futures
industry trade association that represents the brokerage
community on industry, regulatory, political, and educational
issues.
FILL
The price at which an order is executed.
FILL OR KILL
An order which must be filled immediately, and in its entirety.
Failing this, the order will be canceled.
FLOOR
1) The main trading area of an exchange. 2) A supply contract
between a buyer and seller of a commodity, whereby the seller is
assured that he will receive at least some minimum price. This
type of contract is analogous to a put option.
FLOOR BROKER
An exchange member who executes orders to buy or sell futures
and options in the trading ring on the floor of a commodities
exchange.
FLOOR TRADER OR LOCAL
An exchange member who executes orders to buy or sell futures
and options for his own account.
FORCE MAJEURE
A standard clause which indemnifies either or both parties to a
transaction whenever events which the Exchange declares to be
reasonably beyond the control of either party occur to prevent
fulfillment of the terms of the contract.
FORWARD CONTRACT
A supply contract between a buyer and seller, whereby the buyer
is obligated to take delivery and the seller is obligated to provide
delivery of a fixed amount of a commodity at a predetermined
price on a specified future date. Payment in full is due at the time
of, or following, delivery. This differs from a futures contract
where settlement is made daily, resulting in partial payment over
the life of the contract.
FREE ON BOARD(FOB)
A transaction in which the seller provides a commodity at an
agreed unit price, at a specified loading point within a specified
period; it is the responsibility of the buyer to arrange for
transportation and insurance.
FUNDAMENTAL ANALYSIS
The study of pertinent supply and demand factors which influence
the specific price behavior of commodities. See also technical
analysis.
FUNGIBLE
Interchangeable. Products which can be substituted for purposes
of shipment or storage.
FUTURES CONTRACT
A supply contract between a buyer and seller, whereby the buyer
is obligated to take delivery and the seller is obligated to provide
delivery of a fixed amount of a commodity at a predetermined
price at a specified location. Futures contracts are traded
exclusively on regulated exchanges and are settled daily based on
their current value in the marketplace.
FUTURES COMMISSION MERCHANT
An FCM is the only industry participant who receives, handles and
manages customers' funds, margin payments and commission
charges. He is also responsible for confirmation of trade slips,
customer statements, and guarantees.
FUTURESEQUIVALENT
A term frequently used with reference to speculative position
limits for options on futures contracts. The futuresequivalent of
an options position is the number of options multiplied by the
previous day's risk factor or delta for the option series. For
example, 10 deep outofthe money options with a risk factor of
0.20 would be considered two futuresequivalent contracts. The
delta or risk factors used for this purpose is the same as that
used in deltabased margining and risk analysis systems.
GAMMA
The sensitivity of an option's delta to changes in the price of the
underlying futures contract.
HEDGE
The initiation of a position in a futures or options market that is
intended as a temporary substitute for the sale or purchase of the
actual commodity. The sale of futures contracts in anticipation of
future sales of cash commodities as a protection against possible
price declines, or the purchase of futures contracts in anticipation
of future purchases of cash commodities as a protection against
the possibility of increasing costs.
HEDGER
A trader who enters the market with the specific intent of
protecting an existing or anticipated physical market exposure
from unexpected or adverse price fluctuations.
HEDGE RATIO
1) Ratio of the value of futures contracts purchased or sold to the
value of the cash commodity being hedged, a computation
necessary to minimize basis risk. 2) The ratio, determined by an
option's delta, of futures to options required to establish a riskless
position. For example, if a $I/barrel change in the underlying
futures price leads to a $O.25/barrel change in the options
premium, the hedge ratio is four (four options for each futures
contract).
HISTORICAL VOLATILITY
The annualized standard deviation of percent changes in futures
prices over a specific period. It is an indication of past volatility in
the marketplace.
HORIZONTAL SPREAD
Calendar or time spread.
IMMEDIATE OR CANCEL
An order which must be filled immediately or be canceled. IOC
orders need not be filled in their entirety.
IMPLIED VOLATILITY
A measurement of the market's expected price range of the
underlying commodity futures based on the markettraded option
premiums.
INTHEMONEY
An option that can be exercised and immediately closed out
against the underlying market for a cash credit. The option is
inthemoney if the underlying futures price is above a call
option's strike price, or below a put option's strike price.
INDEPENDENT
Term generally applies to a nonintegrated oil or natural gas
company, usually active in only one or two sectors of the
industry. An independent marketer buys petroleum products from
major or independent refiners and resells them under his own
brand name or buys natural gas from producers and resells it.
There are also independents which are active exclusively either in
oil or gas production or refining.
INTRINSIC VALUE
The amount by which an option is inthe-money. An option which
is not inthemoney has no intrinsic value. For calls, intrinsic value
equals the difference between the underlying futures price and the
option's strike price. For puts, intrinsic value equals the option's
strike price minus the underlying futures price Intrinsic value is
never less than zero.
INTRODUCING BROKER
A firm engaged in soliciting or in accepting orders for the purchase
or sale of any commodity for future delivery.
INVERTED MARKET
A futures market is said to be inverted when distant contract
months are selling at a discount to nearby contract months; also
known as backwardation.
INVISIBLE SUPPLY
Uncounted stocks of a commodity in the hands of wholesalers,
manufacturers and producers which cannot be identified
accurately; stocks outside commercial channels but theoretically
available to the market.
LAST NOTICE DAY
The final day on which notices of intent to deliver on futures
contracts may be issued.
LAST TRADING DAY
The final trading day for a particular delivery month futures
contract or option contract. Any futures contracts left open
following this session must be settled by delivery.
LIMIT
The maximum daily allowable amount a futures price may
advance or decline in any one day's trading session. Limits are
also placed on the number of positions a participant may hold in
the market.
LIMIT ORDER
A contingent order for an options or futures trade specifying a
certain maximum (or minimum) price, beyond which the order
(buy or sell) is not to be executed.
LIQUIDATION
The closing out of futures and options positions.
LIQUIDITY
A market is said to be "liquid" when it has a high level of trading
activity and open interest.
LIQUID MARKET
A market characterized by the ability to buy and sell with relative
ease.
LOCAL
An exchange member who executes orders to buy or sell futures
and options for his own account.
LOCKED MARKET
A market where prices have reached their daily trading limit and
trading can only be conducted at that price or prices which are
closer to the previous settlement price.
LONG
1) The market position of a futures contract buyer whose
purchase obligates him to accept delivery unless he liquidates his
contract with an offsetting sale. 2) One who has bought a futures
contract to establish a market position. 3) In the options market,
position of the buyer of a call or put option contract. Opposite of
short.
LONG HEDGE
Purchase of futures against the future market price purchase or
fixed price forward sale of a cash commodity to protect against
price increases.
LONG THE BASIS
A person or firm that has bought the spot commodity and hedged
with a sale of futures is said to be long the basis.
LOT
Any definite quantity of a futures commodity of uniform grade;
the standard unit of trading.
MARGIN
The amount of money or collateral deposited by a customer with
his broker, or deposited by a broker with a clearing member, or
by a clearing member with the Clearinghouse, for the purpose of
insuring the broker or Clearinghouse against adverse price
movement on open futures contracts. The margin is not partial
payment on a purchase. 1) Initial margin is the minimum deposit
per contract required by the broker when a futures position is
opened. 2) Maintenance margin is a sum which must be
maintained on deposit at all times. If the equity in a customers'
account drops to, or under, that level because of an adverse price
movement, the broker must issue a margin call to restore the
customers' equity. Margins are set by the Exchange based on its
analysis of price risk volatility in the market at that time. See
variation margin.
MARGIN CALL
A demand for additional margin funds when futures prices move
adverse to a trader's position, or if margin requirements are
increased. Buyers of options are not subject to margin calls.
MARKEDTOMARKET
Daily cash flow system used by U.S. futures exchanges to
maintain a minimum level of margin equity for a given futures or
options contract position by calculating the gain or loss in each
contract position resulting from changes in the price of the futures
or options contracts at the end of each trading day.
MARKET CORRECTION
In technical analysis, a small reversal in prices following a
significant trending period.
MARKETIFTOUCHED ORDER
An order that becomes a market order when a particular price is
reached. A sell MIT is placed above the market; a buy MIT is
placed below the market.
MARKET MAKER
An independent trader or trading firm which is prepared to buy
and sell futures or options contracts in a designated market.
Market makers provide a twosided (bid and ask) market and
greater liquidity.
MARKETONCLOSE
An order to buy or sell at the end of the trading session at a price
within the closing range of prices.
MARKET ORDER
An order to be filled immediately at the current market price.
MAXIMUM PRICE FLUCTUATION
A commodity exchange's established maximum limits for
fluctuations in futures prices during any one trading session.
MINIMUM PRICE FLUCTUATION
Minimum unit by which a futures price or an option premium can
fluctuate per trade, also known as tick size.
NAKED
A long or short market position taken without having an offsetting
short or long position. A trader who executes one side of a
spread is said to be naked until he executes the other side.
NATIONAL FUTURES ASSOCIATION
Futures industry trade association which promulgates rules of
conduct and mediates disputes between customers and brokers.
NETBACK
Industry term referring to the net FOB cost of product offered on
a delivered or CIF basis. It is derived by subtracting all costs of
shipment from the landed price.
NET POSITION
The difference between an individual or firm's open long contracts
and open short contracts in any one commodity.
NEUTRAL SPREAD
Another name for a delta neutral spread. Spreads may also be lot
neutral, where the total number of long contracts and the total
number of short contracts of the same type are approximately
equal.
NOMINAL PRICE
The declared price for a futures month sometimes used in place
of a closing price when no recent trading has taken place in that
particular delivery month; usually an average of the bid and asked
prices.
OFFER
A motion to sell a futures or option contract at a specified price.
Opposite of bid.
OFFSET
A transaction which liquidates or closes out an open contract
position. In spread positions, one side offsets the other without
liquidating the entire position. Risk is reduced when one side
offsets the other.
OMNIBUS ACCOUNT
An account carried by one futures commission merchant with
another in which the transactions of two or more persons are
combined rather than designated separately and the identity of
the individual accounts is not disclosed.
ONE CANCELS THE OTHER
Two orders submitted simultaneously, either of which may be
filled. If one order is filled, the other is considered to be canceled.
OPEN INTEREST OR COMMITMENT
The number of open or outstanding contracts for which an
individual or entity is obligated to the Exchange because that
individual or entity has not yet made an offsetting sale or
purchase, an actual contract delivery, or, in the case of options,
exercised the option.
OPEN ORDER
A resting order that is good until canceled.
OPEN OUTCRY
A method of public auction for making verbal bids and offers for
contracts in the trading pits or rings of commodity exchanges.
OPENING PRICE
The price for a given futures commodity that is generated by
trading through open outcry during the opening range of trading
on a commodity exchange
OPTION
A contract which gives the holder the right, but not the obligation,
to purchase or to sell the underlying futures contract at a
specified price within a specified period of time in exchange for a
onetime premium payment. The contract also obligates the
writer, who receives the premium, to meet these obligations.
ORIGINAL MARGIN
The initial deposit of funds, as good faith monies, at the outset of
trading a futures contract in order to guarantee fulfillment of its
obligations. Also known as initial margin.
OUTOFTHEMONEY
An option which has no intrinsic value. For calls, an option whose
exercise price is above the market price of the underlying future.
For puts, an option whose exercise price is below the futures
price.
OVERBOUGHT
A technical opinion that the market price has risen too steeply and
too fast in relation to underlying fundamental factors.
OVERSOLD
A technical opinion that the market price has declined too steeply
and too fast in relation to underlying fundamental factors.
OVERWRITE
The writing of more options than one expects to have exercised.
Call options are overwritten because the writer considers the
underlying overvalued. Put options are overwritten because the
underlying is considered undervalued.
PAR OR BASIS GRADE
The grade or grades specified in a given futures contract for
delivery. A contract may permit substitutions for and deviations
from the par grade subject to specified premiums or discounts.
PIT OR RING
The place on the floor of an exchange where a commodity
futures or options contract is traded by open outcry.
POINT OR TICK
The smallest monetary unit of change in a futures price or an
option premium.
POSITION
The net total of a trader's open contracts, either long or short, in
a particular underlying commodity.
POSITION LIMIT
For a single trader or firm, the maximum number of allowable
open contracts with the same underlying commodity.
PREMIUM
1) The price or cost of an option determined competitively by
buyers and sellers in open outcry trading on the exchange trading
floor. 2) An upward adjustment in price allowed for delivery of a
commodity of higher grade against a futures contract.
PRICE DISCOVERY
The manner of making prices visible and readily available to the
public.
PUT OPTION
An option which gives the buyer, or holder, the right, but not the
obligation, to sell a futures contract at a specific price within a
specific period of time in exchange for a onetime premium
payment. It obligates the seller, or writer, of the option to buy the
underlying futures contract at the designated price, should an
option be exercised at that price. See call option.
RALLY
An advancing price movement following a decline in a market.
RANGE
The difference between the highest and lowest prices recorded
during a given trading period.
RATIO SPREAD
Any spread where the number of long market contracts and the
number of short market contracts are unequal.
REPORTABLE POSITION
The number of futures contracts, as deter mined by the Exchange
or the CFTC, above which a customer must be identified daily to
the Exchange and to the CFTC with regard to the size of his
position by commodity, by delivery month, and by purpose of the
trading.
RESISTANCE
Opposite of support.
RESTING ORDER
An order away from the market, waiting to be executed.
ROLLOVER
A special futures straddle trading procedure involving the shift of
one month of a straddle into another future month while
maintaining the other contract month of the original spread
position. The shift can take place in either the long or short
straddle month.
POUND LOT
A quantity of a commodity equal in sire to the corresponding
futures contract for the commodity, as distinguished from a job
lot, which may be larger or smaller than the contract.
ROUNDTURN
The completion of both a purchase and sale of a commodity
futures contract.
SCALPER
A speculator on the trading floor of an exchange who buys and
sells rapidly, with small profits or losses, holding his positions for
only a short time during a trading session. Typically a scalper will
stand ready to buy at a fraction below the last transaction price
and to sell at a fraction above, thus creating market liquidity.
SELLER'S MARKET
A condition of the market in which there is a scarcity of goods
available and hence sellers can obtain better conditions of sale or
higher prices. See buyer's market.
SELLING HEDGE (OR SHORT HEDGE)
Selling futures contracts to protect against possible decreased
prices of commodities. Also see hedging.
SERIAL EXPIRATION
Options on the same underlying futures contract which expire in
more than one month.
SERIES
All options of the same class which share a common strike price.
SETTLEMENT OR SETTLING PRICE
The price established by the Exchange settlement committee at
the close of each trading session as the official price to be used by
the clearinghouse in determining net gains or losses, margin
requirements, and the next day's price limits. The term
"settlement price" is often used as an approximate equivalent to
the term "closing price." The close in futures trading refers to a
brief period at the end of the day, during which transactions
frequently take place quickly and at a range of prices immediately
before the bell. Therefore, there frequently is no one dosing price,
but a range of prices. The settlement price is derived by
calculating the weighted average of prices during that period.
SHORT
1) The market position of a futures contract seller whose sale
obligates him to deliver the commodity unless he liquidates his
contract by an offsetting purchase. 2) A trader whose net
position in the futures market shows an excess of open sales
over open purchases. 3) The holder of a short position. 4) In the
options market, the position of the seller of a call or a put option.
The short in the options market is obliged to take a futures
position if he is assigned for exercise. Opposite of long.
SHORT SELLING
Selling a contract with the idea of delivering or of buying to offset
it at a later date.
SHORT THE BASIS
The purchase of futures as a hedge against a commitment to sell
in the cash or spot markets. See hedging.
SPECULATIVE POSITION LIMIT
The maximum position, either net long or net short, in one
commodity futures or option, or in all futures or options of one
commodity combined, which may be held or controlled by an
entity without a hedge exemption as prescribed by an exchange
or the CFTC.
SPECULATOR
A trader who hopes to profit from the specific directional price
move of a futures or options contract, or commodity.
SPOT
Term which describes onetime open market case transaction,
where a commodity is purchased "on the spot" at current market
rates. Spot transactions are in contrast to term sales, which
specify a steady supply of product over a period of time.
SPOT MONTH
The futures contract closest to maturity. The nearby delivery
month.
SPREAD(FUTURES)
The simultaneous purchase of futures contracts and sale of
futures contracts for a different months, different commodities,
or different grades of the same commodity.
SPREAD(OPTIONS)
The purchase and sale of options which vary in terms of type (call
or put), strike prices, expiration dates, or both. May also refer to
an options contract purchase (sale) and the simultaneous sale
(purchase) of a futures contract for the same underlying
commodity.
STOP LIMIT ORDER
An order that goes into force as soon as there is a trade at the
specified stop price. The order, however, can only be filled at the
limit price or better. The stop price and the limit price can be the
same or different. The stop price is the price level specified in the
order.
STOPLOSS
A resting order designed to close out a losing position when the
price reaches a level specified in the order. It becomes an
atthemarket order when the "stop" price is reached. Individuals
also use stops to enter the market when the prices reach a
specified level.
STRADDLE (FUTURES)
Also known as a spread, the purchase of one futures month
against the sale of another futures month of the same
commodity. A straddle trade is based on a price relationship
between the two months.
STRADDLE (OPTIONS)
The purchase or sale of both a put and a call having the same
strike price and expiration date. The buyer of a straddle benefits
from increased volatility, and the seller benefits from decreased
volatility.
STRANGLE
An options position consisting of the purchase or sale of put and
call options having the same expiration but different strike prices.
STRIKE PRICE
The price at which the underlying futures contract is bought or
sold in the event an option is exercised. Also called an exercise
price.
SUPPORT
In technical analysis, a price area where new buying is likely to
come in and stem any decline.
SYNTHETIC FUTURES
A position created by combining call and put options. A synthetic
long futures position is created by combining a long call option
and a short put option for the same expiration date and the same
strike price. A synthetic short futures position is created by
combining a long put and a short call with the same expiration
date and the same strike price.
TECHNICAL ANALYSIS
An approach to forecasting commodity prices which examines
patterns of price change, rates of change, and changes in trading
volume and open interest, without regard to underlying
fundamental market conditions.
THEORETICAL VALUE
An option's value generated by a mathematical model given
certain prior assumptions about the term of the option, the
characteristics of the underlying futures contract, and prevailing
interest rates.
THETA
The sensitivity of an option's value to a change in the amount of
time to expiration.
TICK
A minimum change in price, up or down.
TIME SPREAD
The selling of a nearby option and buying of a more deferred
option with the same strike price.
TIME VALVE
Part of the option premium which reflects the excess over the
intrinsic value, or the entire premium if there is no intrinsic value.
At given price levels the option's time value will decline until
expiration. It is this decrease in time value that makes options a
wasting asset.
TRADE HOUSE
A firm which deals in the physical commodity.
TRADING
Buying and selling.
TRADING VOLUME
The number of contracts that change hands during a specified
period of time.
TREND
The general direction of price movement.
TYPE OF OPTION
Either puts or calls.
UNDERLYING
The stock, commodity, futures contract, or cash index against
which the futures or options contract is valued.
VARIATION MARGIN
Payment made on a daily or intraday basis by a clearing member
to the clearinghouse to cover losses created by adverse price
movement in positions carried by the clearing member, calculated
separately for customer and proprietary positions.
VEGA
The sensitivity of an option's value to a change in volatility.
VOLATILITY
The market's price range and movement within that range. The
direction of the price move, whether up or down, is not relevant.
Historic volatility indicates how much prices have changed in the
past and is derived by using daily settlement prices for futures.
Implied volatility measures how much the market thinks prices will
change in the future, and is obtained from daily settlement prices
for options.
WRITER
The seller of an option. Also known as the grantor of the option.