Glossary of Terms
The following glossary is a compilation of commodity futures
industry terms from several sources.
The definitions are not intended to state or suggest the correct
legal significance or meaning of any word or phrase. The terms and definitions
were collected with the intent to assist in your comprehension of the futures
and options industry.
A B C
D E F
G H I
J K L
M N O
P Q R
S T U
V W X
Y Z
Accrued Interest
Interest earned between the most recent interest payment and the present date
but not yet paid to the lender.
A/C/E
The Chicago Board of Trade's electronic trading interface.
Add-on Method
A method of paying interest where the interest is added onto the principal at
maturity or interest payment dates.
Adjusted Futures Price
The cash-price equivalent reflected in the current futures price. This is
calculated by taking the futures price times the conversion factor for the
particular financial instrument (e.g., bond or note) being delivered.
Arbitrage
The simultaneous purchase and sale of identical or equivalent financial
instruments or commodity futures in order to benefit from a discrepancy in their
price relationship.
Arbitration
The procedure of settling disputes between members, or between members and
customers.
Ask
A motion to sell. The same as offer. Indicates a willingness to sell a futures
contract at a given price. (See Bid.)
Assignment
To make an option seller perform his obligation to assume a short futures
position (as a seller of a call option) or a long futures position (as a seller
of a put option).
Associated Person (AP)
An individual who solicits orders, customers, or customer funds (or who
supervises persons performing such duties) on behalf of a Futures Commission
Merchant, an Introducing Broker, a Commodity Trading Adviser, or a Commodity
Pool Operator.
At-the-Money Option
An option with a strike price that is equal, or approximately equal, to the
current market price of the underlying futures contract.
Back Month
The futures or options on futures months being traded that are furthest from
expiration.
Balance of Payment
A summary of the international transactions of a country over a period of time;
including commodity and service transactions, capital transactions, and gold
movements.
Bar Chart
A chart that graphs the high, low, and settlement prices for a specific trading
session over a given period of time.
Basis
The difference between the current cash price and the futures price of the same
commodity. Unless otherwise specified, the price of the nearby futures contract
month is generally used to calculate the basis.
Bear
One who believes prices will move lower.
Bear Market
A market in which prices are declining.
Bear Spread
In most commodities and financial instruments, the term refers to selling the
nearby contract month, and buying the deferred contract, to profit from a change
in the price relationship.
Bid
The price that the market participants are willing to pay. A motion to buy a
futures or options contract at a specified price. Opposite of offer.
Board of Trade Clearing Corporation
An independent corporation that settles all trades made at the Chicago Board of
Trade acting as a guarantor for all trades cleared by it, reconciles all
clearing member firm accounts each day to ensure that all gains have been
credited and all losses have been collected, and sets and adjusts clearing
member firm margins for changing market conditions. Also referred to as clearing
corporation. (See Clearinghouse).
Book Entry Securities
Electronically recorded securities that include each creditor's name, address,
Social Security or tax identification number, and dollar amount loaned, (i.e.,
no certificates are issued to bond holders, instead, the transfer agent
electronically credits interest payments to each creditor's bank account on a
designated date).
Broker
A company or individual that executes futures and options orders on behalf of
financial and commercial institutions and/or the general public.
Bull
One who expects prices to rise.
Bull Market
A market in which prices are rising.
Bull Spread
In most commodities and financial instruments, the term refers to buying the
nearby month, and selling the deferred month, to profit from the change in the
price relationship.
Butterfly Spread
The placing of two interdelivery spreads in opposite directions with the center
delivery month common to both spreads.
Buy
Purchase. A transaction type that indicates you wish to make a purchase or to go
long. Opposite of selling or going short.
Buy OCO (Buy Order Cancels Order)
Two alternative instructions for a Buy Order. The execution of either
alternative will result in the cancellation of the other. Buy and sell
instructions cannot be combined. Normally placed as limit and stop surrounding
current market price.
Buy Spread
A transaction type you choose to indicate an option buy spread.
Buy On Close
To buy at the end of a trading session at a price within the closing range.
Buy On Opening
To buy at the beginning of a trading session at a price within the opening
range.
Cabinet Trade
A trade that allows options traders to liquidate deep out-of-the-money options
by trading the option at a price equal to less than one tick.
Call
(see Call Option)
Call Option
An option that gives the buyer the right, but not the obligation, to purchase
(go "long'') the underlying futures contract at the strike price on or
before the expiration date.
Canceling Order
An order that removes a customer's previous order from the market.
Carrying Charge (Cost of Carry)
For physical commodities such as grains and metals, the cost of storage space,
insurance, and finance charges incurred by holding a physical commodity. In
interest rate futures markets, it refers to the differential between the yield
on a cash instrument and the cost necessary to buy the instrument.
Carryover
Grain and oilseed commodities not consumed during the marketing year and
remaining in storage at year's end. These stocks are "carried over'' into
the next marketing year and added to the stocks produced during that crop year.
Cash Balance
At SGI, the cash funds (liquid) that you have in your account at the
beginning of the trading day. The balance does not change during the day. (It is
not marked-to-market.) It's a once a day snapshot of your account, calculated at
the end of the previous trading day, and takes into account the trades you
placed that day and the changes in market value in your options and futures
positions.
Cash Commodity
An actual physical commodity someone is buying or selling, e.g., soybeans, corn,
gold, silver, Treasury bonds, etc. Also referred to as actuals.
Cash Contract
A sales agreement for either immediate or future delivery of the actual product.
Cash Market
A place where people buy and sell the actual commodities, i.e., grain elevator,
bank, etc. See Spot and Forward
Contract.
Cash Settlement
Transactions generally involving index-based futures contracts that are settled
in cash based on the actual value of the index on the last trading day. Cash
settlement is in contrast to those contracts that specify the delivery of a
commodity or financial instrument.
Certificate of Deposit (CD)
A time deposit with a specific maturity evidenced by a certificate.
CFTC (Commodity Futures Trading Commission)
A federal regulatory agency established under the Commodity Futures Trading
Commission Act, as amended in 1974, that oversees futures trading in the United
States. The commission is comprised of five commissioners, one of whom is
designated as chairman, all appointed by the President subject to Senate
confirmation, and is independent of all cabinet departments.
Charting
The use of charts to analyze market behavior and anticipate future price
movements. Those who use charting as a trading method plot such factors as high,
low, and settlement prices; average price movements; volume; and open interest.
Two basic price charts are bar charts and point-and-figure charts. See Technical
Analysis.
Cheapest to Deliver
A method to determine which particular cash debt instrument is most profitable
to deliver against a futures contract.
Clear
The process by which a clearinghouse maintains records of all trades and settles
margin flow on a daily mark-to-market basis for its clearing member.
Clearing
(see Clear)
Clearing Margin
Financial safeguards to ensure that clearing members (usually companies or
corporations) perform on their customers' open futures and options contracts.
Clearing margins are distinct from customer margins that individual buyers and
sellers of futures and options contracts are required to deposit with brokers.
See Customer Margin.
Clearing Member
A member of a clearinghouse. Memberships in clearing organizations are usually
held by companies. Clearing members are responsible for the financial
commitments of customers that clear through their firm.
Clearinghouse
An agency or separate corporation of a futures exchange that is responsible for
settling trading accounts, clearing trades, collecting and maintaining margin
monies, regulating delivery, and reporting trading data. Clearinghouses act as
third parties to all futures and options contracts acting as a buyer to every
clearing member seller and a seller to every clearing member buyer.
Close
The period at the end of the trading session. Sometimes used to refer to the
closing range. (See Opening)
Closing Range
A range of prices at which transactions took place at the closing of the market;
buy and sell orders during the closing period may have been filled at any point
within such a range.
COM Membership (CBOT)
A Chicago Board of Trade membership that allows an individual to trade contracts
listed in the commodity options market category.
Commission Fee
A fee charged by a broker for executing a transaction. Also referred to as
brokerage fee.
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
An article of commerce or a product that can be used for commerce. In a narrow
sense, products traded on an authorized commodity exchange. The types of
commodities include agricultural products, metals, petroleum, foreign
currencies, and financial instruments and indexes, to name a few.
Commodity Pool
An enterprise in which funds contributed by a number of persons are combined for
the purpose of trading futures contracts or commodity options.
Commodity Pool Operator (CPO)
An individual or organization that operates or solicits funds for a commodity
pool.
Commodity Trading Adviser (CTA)
A person who, for compensation or profit, directly or indirectly advises others
as to the value or the advisability of buying or selling futures contracts or
commodity options. Advising indirectly includes exercising trading authority
over a customer's account as well as providing recommendations through written
publications or other media.
Consumer Price Index (CPI)
A major inflation measure computed by the U.S. Department of Commerce. It
measures the change in prices of a fixed market basket of some 385 goods and
services in the previous month.
Contract
Unit of trading for a financial or commodity future. Also, actual bilateral
agreement between the parties (buyer and seller) of a futures or options on
futures transaction as defined by an exchange.
Contract Month
The specified month in which futures contracts may be satisfied by making or
accepting delivery. (See Delivery Month.)
Convergence
A term referring to cash and futures prices tending to come together (i.e., the
basis approaches zero) as the futures contract nears expiration.
Conversion Factor
A factor used to equate the price of T-bond and T-note futures contracts with
the various cash T-bonds and T-notes eligible for delivery.
Coupon
The interest rate on a debt instrument expressed in terms of a percent on an
annualized basis that the issuer guarantees to pay the holder until maturity.
Crop (Marketing) Year
The time span from harvest to harvest for agricultural commodities. The crop
marketing year varies slightly with each ag commodity, but it tends to begin at
harvest and end before the next year's harvest, e.g., the marketing year for
soybeans begins September 1 and ends August 31. The futures contract month of
November represents the first major new-crop marketing month, and the contract
month of July represents the last major old-crop marketing month for soybeans.
Crop Reports
Reports compiled by the U.S. Department of Agriculture on various Ag commodities
that are released throughout the year. Information in the reports includes
estimates on planted acreage, yield, and expected production, as well as
comparison of production from previous years.
Cross-Hedging
Hedging a cash commodity using a different but related futures contract when
there is no futures contract for the cash commodity being hedged and the cash
and futures markets follow similar price trends (e.g., using soybean meal
futures to hedge fish meal)
Crush Spread
The purchase of soybean futures and the simultaneous sale of soybean oil and
meal futures. See Reverse Crush.
Current Yield
The ratio of the coupon to the current market price of the debt instrument
CUBS
CUBS (The Chicago Mercantile Exchange Universal Broker Station) is an electronic
system that automates the filling broker's order desk. It enables brokers to
electronically fill and report orders from the order originator. In addition,
CUBS can interface with TOPS Route to provide a direct link from the firm order
desk to its filling brokers. The system displays incoming orders to the broker's
deck and allows the broker to accept or reject each order. CUBS also manages the
broker deck by: arranging orders according to price and time; summarizing and
displaying order information; automatically allocating trades to individual
orders. In addition, the system captures endorsement information for filled
orders and provides on-line inquiry capabilities. CUBS users benefit from
expedient fill reporting, improved audit trails, as well as reduced paper flow,
transcription errors and out trades.
Customer Margin
Within the futures industry, financial guarantees required of both buyers and
sellers of futures contracts and sellers of options contracts to ensure
fulfillment of contract obligations. FCMs are responsible for overseeing
customer margin accounts.
Daily Trading Limit
The maximum price range set by the exchange each day for a contract.
Day Order
An order that is placed for execution during only one trading session. If the
order cannot be executed during that session, it is automatically cancelled.
Day Trade
The purchase and sale of a futures or an options contract in the same day
session, thus ending the day with no established position in the market or being
flat.
Day Traders
Speculators who take positions in futures or options contracts and liquidate
them prior to the close of the same trading day.
Day Trading
(see Day Trade)
Deferred (Delivery) Month
The more distant month(s) in which futures trading is taking place, as
distinguished from the nearby (delivery) month.
Deliverable Grades
The standard grades of commodities or instruments listed in the rules of the
exchanges that must be met when delivering cash commodities against futures
contracts. Grades are often accompanied by a schedule of discounts and premiums
allowable for delivery of commodities of lesser or greater quality than the
standard called for by the exchange.
Delivery
The transfer of the cash commodity from the seller of a futures contract to the
buyer of a futures contract. Each futures exchanges has specific procedures for
delivery of a cash commodity. Some futures contracts, such as stock index
contracts, are cash settled.
Delivery Month
A specific month in which delivery may take place under the terms of a futures
contract. Also referred to as contract month.
Delivery Points
The locations and facilities designated by a futures exchange where stocks of a
commodity may be delivered in fulfillment of a futures contract, under
procedures established by the exchange.
Delta
A measure of how much an option premium changes, given a unit change in the
underlying futures price. Delta often is interpreted as the probability that the
option will be in-the-money by expiration.
Differentials
Price differences between classes, grades, and delivery locations of various
stocks of the same commodity.
Discount Method
A method of paying interest by issuing a security at less than par and repaying
par value at maturity. The difference between the higher par value and the lower
purchase price is the interest.
Discount Rate
The interest rate charged on loans by the Federal Reserve to member banks.
Discretionary Account
An arrangement by which the holder of the account gives written power of
attorney to another person, often his broker, to make trading decisions. Also
known as a controlled or managed account.
Econometrics
The application of statistical and mathematical methods in the field of
economics to test and quantify economic theories and the solutions to economic
problems.
Electronic Clerk (EC)
A Chicago Board of Trade order receipt device that brokers use to receive,
manage, and endorse customer orders.
Equilibrium Price
The market price at which the quantity supplied of a commodity equals the
quantity demanded.
Eurodollars
U.S. dollars on deposit with a bank outside of the United States and,
consequently, outside the jurisdiction of the United States. The bank could be
either a foreign bank or a subsidiary of a U.S. bank.
European Terms
A method of quoting exchange rates, which measures the amount of foreign
currency needed to buy one U.S. dollar, i.e., foreign currency unit per dollar.
See Reciprocal of European Terms.
Exchange of Futures for Physicals (EFP)
A transaction generally used by two hedgers who want to exchange futures for
cash positions. Also referred to as "against actuals" or "versus
cash."
Exercise
The action taken by the holder of a call option if he wishes to purchase the
underlying futures contract or by the holder of a put option if he wishes to
sell the underlying futures contract.
Exercise Price
The price at which the futures contract underlying a call or put option can be
purchased (if a call) or sold (if a put). Also referred to as strike price.
Expiration Date
The last day that an option may be exercised into the underlying futures
contract. Also, the last day of trading for a futures contract.
Extrinsic Value
See Time Value.
Face Value
The amount of money printed on the face of the certificate of a security; the
original dollar amount of indebtedness incurred.
Federal Funds
Member bank deposits at the Federal Reserve; these funds are loaned by member
banks to other member banks.
Federal Funds Rate
The rate of interest charged for the use of federal funds.
Federal Reserve System
A central banking system in the United States, created by the Federal Reserve
Act in 1913, designed to assist the nation in attaining its economic and
financial goals. The structure of the Federal Reserve System includes a Board of
Governors, the Federal Open Market Committee, and 12 Federal Reserve Banks.
Feed Ratio
A ratio used to express the relationship of feeding costs to the dollar value of
livestock. See Steer/Corn Ratio.
Fill-or-Kill (FOK)
A customer order that is a price limit order that must be filled immediately or
canceled.
Financial Instrument
There are two basic types: (1) a debt instrument, which is a loan with an
agreement to pay back funds with interest; (2) an equity security, which is a
share or stock in a company.
First Notice Day (FND)
The first day on which a notice of intent to deliver a commodity in fulfillment
of a given month's futures contract can be made by the clearinghouse to a buyer.
The clearinghouse also informs the seller who they have been matched up with.
Floor Broker
An individual who executes orders for the purchase or sale of any commodity
futures or options contract on any contract market for any other person. A floor
broker executing orders must be licensed by the CFTC.
Floor Trader
An exchange member who generally trades only for his/her own account or for an
account controlled by him/her. Also referred to as a "local."
Forex Market
An over-the-counter market where buyers and sellers conduct foreign exchange
business by telephone and other means of communication. Also referred to as
foreign exchange market.
Forward (Cash) Contract
A cash contract in which a seller agrees to deliver a specific cash commodity to
a buyer sometime in the future. Forward contracts, in contrast to futures
contracts, are privately negotiated and are not standardized.
Full Carrying-Charge Market
A futures market where the price difference between delivery months reflects the
total costs of interest, insurance, and storage.
Fundamental Analysis
A method of anticipating future price movement using supply and demand
information.
Futures
A term used to designate all contracts covering the purchase and sale of
financial instruments or physical commodities for future delivery on a commodity
futures exchange.
Futures Commission Merchant (FCM)
A firm or person engaged in soliciting or accepting and handling orders for the
purchase or sale of futures contracts, subject to the rules of a futures
exchange and, who, in connection with solicitation or acceptance of orders,
accepts any money or securities to margin any resulting trades or contracts. The
FCM must be licensed by the CFTC.
Futures Contract
A legally binding agreement, made on a futures exchange, to buy or sell a
commodity or financial instrument sometime in the future. Futures contracts are
standardized according to the quality, quantity, and delivery time and location
Futures Exchange
A central marketplace with established rules and regulations where buyers and
sellers meet to trade futures and options on futures contracts.
Gamma
A measurement of how fast delta changes, given a unit change in the underlying
futures price.
GLOBEX®
The CME's global electronic trading system.
Good 'til Canceled (GTC)
An order worked by a broker until it can be filled or until canceled. (see Open
Order)
Grain Terminal
Large grain elevator facility with the capacity to ship grain by rail and/or
barge to domestic or foreign markets.
Gross Domestic Product (GDP)
The value of all final goods and services produced by an economy over a
particular time period, normally a year.
Gross National Product (GNP)
Gross Domestic Product plus the income accruing to domestic residents as a
result of investments abroad less income earned in domestic markets accruing to
foreigners abroad.
Gross Processing Margin (GPM)
The difference between the cost of soybeans and the combined sales income of the
processed soybean oil and meal.
Hedge
The purchase or sale of a futures contract as a temporary substitute for a cash
market transaction to be made at a later date. Usually it involves opposite
positions in the cash market and futures market at the same time. (See long
hedge, short hedge.)
Hedger
An individual or company owning or planning to own a cash commodity corn,
soybeans, wheat, U.S. Treasury bonds, notes, bills, etc. and concerned that the
cost of the commodity may change before either buying or selling it in the cash
market. A hedger achieves protection against changing cash prices by purchasing
(selling) futures contracts of the same or similar commodity and later
offsetting that position by selling (purchasing) futures contracts of the same
quantity and type as the initial transaction.
Hedging
The practice of offsetting the price risk inherent in any cash market position
by taking an equal but opposite position in the futures market. Hedgers use the
futures markets to protect their businesses from adverse price changes. See
Selling (Short) Hedge and Purchasing (Long)
Hedge.
High
The highest price for a particular futures contract over a specified time
period.
Holder
One who purchases an option.
Horizontal Spread
The purchase of either a call or put option and the simultaneous sale of the
same type of option with typically the same strike price but with a different
expiration month. Also referred to as a calendar spread.
Initial Margin
The minimum value on deposit in your account to establish a new futures or
options position, or to add to an existing position. Initial margin amount
levels differ by contract. R.J. O'Brien sets the level of initial margin required,
and it may change at any time at R.J. O'Brien's discretion. Increases or decreases in
initial margin levels reflect anticipated or actual changes in market
volatility.
Also called "Initial Performance Bond."
Intercommodity Spread
The purchase of a given delivery month of one futures market and the
simultaneous sale of the same delivery month of a different, but related,
futures market.
Interdelivery Spread
The purchase of one delivery month of a given futures contract and simultaneous
sale of another delivery month of the same commodity on the same exchange. Also
referred to as an intramarket or calendar spread.
Intermarket Spread
The sale of a given delivery month of a futures contract on one exchange and the
simultaneous purchase of the same delivery month and futures contract on another
exchange.
In-the-Money Option
An option with intrinsic value. A call option is in-the-money if its strike
price is below the current price of the underlying futures contract. A put
option is in-the-money if its strike price is above the current price of the
underlying futures contract. See Intrinsic Value.
Intrinsic Value
The amount by which an option is in-the-money. See In-the-Money
Option.
Introducing Broker (IB)
A person or organization that solicits or accepts orders to buy or sell futures
contracts or commodity options but does not accept money or other assets from
customers to support such orders.
Inverted Market
A futures market in which the relationship between two delivery months of the
same commodity is abnormal.
Invisible Supply
Uncounted stocks of a commodity in the hands of wholesalers, manufacturers, and
producers that cannot be identified accurately; stocks outside commercial
channels but theoretically available to the market.
Lagging Indicators
Market indicators showing the general direction of the economy and confirming or
denying the trend implied by the leading indicators. Also referred to as
concurrent indicators.
Last Trading Day
The final day when trading may occur in a given futures or options contract
month. Futures contracts outstanding at the end of the last trading day must be
settled by delivery of the underlying commodity or securities or by agreement
for monetary settlement (in some cases by EFPs).
Leading Indicators
Market indicators that signal the state of the economy for the coming months.
Some of the leading indicators include: average manufacturing workweek, initial
claims for unemployment insurance, orders for consumer goods and material,
percentage of companies reporting slower deliveries, change in manufacturers'
unfilled orders for durable goods, plant and equipment orders, new building
permits, index of consumer expectations, change in material prices, prices of
stocks, change in money supply.
Leverage
The ability to control large dollar amounts of a commodity with a comparatively
small amount of capital.
Limit Order (LMT)
An order given 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.
Limit Price
(See maximum price fluctuation.)
Linkage
The ability to buy (sell) contracts on one exchange (such as the Chicago
Mercantile Exchange) and later sell (buy) them on another exchange (such as the
Singapore Exchange).
Liquid
A characteristic of a security or commodity market with enough units outstanding
to allow large transactions without a substantial change in price. Institutional
investors are inclined to seek out liquid investments so that their trading
activity will not influence the market price.
Liquidate
Selling (or purchasing) futures contracts of the same delivery month purchased
(or sold) during an earlier transaction or making (or taking) delivery of the
cash commodity represented by the futures contract. See Offset.
Liquidation
Any transaction that offsets or closes out a long or short futures position.
Loan Rate
The amount lent per unit of a commodity to farmers by the U.S. Government.
Long
One who has bought a futures or options on futures contract to establish a
market position through an offsetting sale; the opposite of short.
Long Hedge
The purchase of a futures contract in anticipation of an actual purchase in the
cash market. Used by processors or exporters as protection against an advance in
the cash price. (See hedge, short
hedge.)
Long Options Value
The combined value of all options purchased. Options marked to the last reported
price. Market movement may cause bids and offers to be away from the last
reported price.
Low
The lowest price of a specified time period for a particular futures contract.
Market-If-Touched (M.I.T.)
A price order that automatically becomes a market order if the price is reached.
Maintenance Margin
The minimum value required in an account in order to continue to hold a
position. The maintenance margin is typically less than the initial margin, and
also differs by contract. If your account falls below the maintenance margin
requirement, you will receive a margin call. If you wish to continue to hold the
position, you will be required to restore your account to the full initial
margin level (not to the maintenance margin level). Also known as the
Maintenance Performance Bond.
Managed Futures
Represents an industry comprised of professional money managers known as
commodity trading advisors who manage client assets on a discretionary basis,
using global futures markets as an investment medium.
Margin Call
A call from a clearinghouse to a clearing member, or from a brokerage firm to a
customer, to bring margin deposits up to a required minimum level.
Market Order (MKT)
An order to buy or sell a specified commodity, including quantity and delivery
month at the best possible price available, as soon as possible.
Market on Close (MOC)
An order to buy or sell at the end of the trading session at a price within the
closing range of prices.
Market Reporter
A person employed by the exchange and located in or near the trading pit who
records prices as they occur during trading.
Mark-to-Market
The daily adjustment of margin accounts to reflect profits and losses based on
that day's price changes in each market.
Maximum Price Fluctuation
The maximum amount the contract price can change, up or down, during one trading
session, as stipulated by Exchange rules.
Minimum Price Fluctuation
Smallest increment of price movement possible in trading a given contract, often
referred to as a "tick."
Money Supply
The amount of money in the economy, consisting primarily of currency in
circulation plus deposits in banks.
Moving-Average Charts
A statistical price analysis method of recognizing different price trends. A
moving average is calculated by adding the prices (e.g. closing price) for a
predetermined number of days and then dividing by the number of days.
Municipal Bonds
Debt securities issued by state and local governments, and special districts and
counties.
National Futures Association (NFA)
An industry-wide, industry-supported, self-regulatory organization for futures
and options markets. The primary responsibilities of the NFA are to enforce
ethical standards and customer protection rules, screen futures professionals
for membership, audit and monitor professionals for financial and general
compliance rules, and provide for arbitration of futures-related disputes.
Nearby
The nearest active trading month of a futures or options on futures contract.
Also referred to as "lead month."
Nearby (Delivery) Month
The futures contract month closest to expiration. Also referred to as spot
month.
Net Liquidation Value
Total Trade Equity plus Net Option Value, on a marked-to-market basis. It is the
value of your account if you were to liquidate all positions in your account.
This information appears on your account statement.
Net Options Value
The credit or debit value of all option positions combined,
marked-to-the-market.
Notice Day
The second day of the three-day delivery process when the clearing corporation
matches the buyer with the oldest reported long position to the delivering
seller and notifies both parties. See First Notice
Day.
Offer
Indicates a willingness to sell a futures contract at a given price. Also called
"ask" (See Bid).
Offset
Taking a second futures or options position opposite to the initial or opening
position. This means selling, if one has bought, or buying, if one has sold, a
futures or option on a futures contract. (See Liquidate)
OPEC (Organization of Petroleum Exporting Countries)
This organization emerged as the major petroleum pricing power in 1973, when the
ownership of oil production in the Middle East transferred from the operating
companies to the governments of the producing countries or to their national
oil. Members are: Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar,
Saudi Arabia, the United Arab Emirates, and Venezuela.
Open Interest
Total number of futures or options on futures contracts that have not yet been
offset or fulfilled by delivery. An indicator of the depth or liquidity of a
market (the ability to buy or sell at or near a given price) and of the use of a
market for risk- and/or asset-management.
Open Market Operation
The buying and selling of government securities Treasury bills, notes, and bonds
by the Federal Reserve.
Open Order
An order to a broker that is good until it is canceled or executed. (See GTC)
Open Outcry
Method of public auction for making verbal bids and offers in the trading pits
or rings of futures exchanges.
Open Trade Equity
The difference between the initial trade price and the last tick of the market.
It is marked-to-market. It is the value of the positions you are holding, if you
were you to close the position at the last tick.
Opening Price
(See Opening Range)
Opening Range
The range of prices at which the first bids and offers were made or first
transactions were completed.
Opening
The period at the beginning of the trading session during which all transactions
are considered made or first transactions were completed.
Option
A contract giving the holder the right, but not the obligation, hence,
"option," to buy (call option) or sell (put option) a futures contract
in a given commodity at a specified price at any time between now and the
expiration of the option contract.
Option Buyer
The purchaser of either a call or put option. Option buyers receive the right,
but not the obligation, to assume a futures position. Also referred to as the
holder.
Option Premium
The price of an option. The sum of money that the option buyer pays and the
option seller receives for the rights granted by the option.
Option Seller
The person who sells an option in return for a premium and is obligated to
perform when the holder exercises his right under the option contract. Also
referred to as the writer.
Option Spread
The simultaneous purchase and sale of one or more options contracts, futures,
and/or cash positions.
Or Better (OB)
A variation of a limit order in which the market is at or better than the limit
specified.
Or Better Open Only (OBOO)
A variation of a limit order in which the market has an opening range at or
better than the specified limit. The order can be executed only at the opening
range of the trading session.
Or Better Close Only (OBCO)
A variation of a limit order in which the market has a closing range at or
better than the specified limit. The order can be executed only at the closing
range of the trading session.
Original Margin
The amount a futures market participant must deposit into a margin account when
placing an order to buy or sell a futures contract. Also referred to as initial
margin.
Out-of-the-Money Option
An option with no intrinsic value, i.e., a call whose strike price is above the
current futures price or a put whose strike price is below the current futures
price. Its value is solely time related.
Out-Trades
A situation that results when there is some confusion or error on a trade, e.g.,
over difference in the understanding of the price which a trade is done, or the
number of contracts that were traded.
Over-the-Counter (OTC) Market
A market where a product such as stocks, foreign currencies, and other cash
items are bought and sold by telephone and other means of communication.
P&S (Purchase and Sale) Statement
A statement sent by a commission house to a customer, showing the number of
contracts bought or sold, the prices at which the contracts were bought or sold,
the gross profit or loss, the commission charges, and the net profit or loss on
the transactions.
Par
The face value of a security. For example, a bond selling at par is worth the
same dollar amount as when it was issued or the price at which it will be
redeemed at maturity.
Performance Bond
Funds that must be deposited by a customer with a broker, by a broker with a
clearing member or by a clearing member, with the clearinghouse to initiate or
maintain a market position. The performance bond helps to ensure the financial
integrity of brokers, clearing members and the exchange. Also known as Margin.
Performance Bond Call (Margin Call)
A demand for additional funds because of adverse price movement.
Pit
The area on an exchange trading floor where futures and options on futures
contracts are bought and sold. Pits are usually raised octagonal platforms with
steps descending on the inside that permit buyers and sellers of contracts to
see each other.
Point-and-Figure Charts
Charts that show price changes of a minimum amount regardless of the time period
involved.
Position
A market commitment. A buyer of a futures contract is said to have a long
position and, conversely, a seller of futures contracts is said to have a short
position.
Position Day
The first day in the process of making or taking delivery of the actual
commodity on a futures contract. The clearing firm representing the seller
notifies the clearinghouse that its short customers want to deliver on a futures
contract.
Position Limit
The maximum number of speculative futures contracts one can hold as determined
by the Commodity Futures Trading Commission and/or the exchange upon which the
contract is traded. Also referred to as trading limit.
Position Trader
An approach to trading, in which the trader either buys or sells, contracts and
holds them for an extended period of time.
Premium
(1) The excess of one futures contract price over that of another, or over the
cash market price.
(2) The amount agreed upon between the purchaser and seller for the purchase or
sale of a futures option—purchasers pay the premium and the seller (writer)
receives the premium.
Price Discovery
The generation of information about "future'' cash market prices through
the futures markets.
Price Limit
The maximum advance or decline from the previous day's settlement price
permitted for a contract in one trading session by the rules of the exchange.
See also Variable Limit, Maximum Price
Fluctuation.
Price Limit Order
An order that specifies the highest price at which a bidder will pay for a
contract, or the lowest price a seller will sell a contract.
Primary Dealer
A designation given by the Federal Reserve System to commercial banks or
broker/dealers who meet specific criteria. Among the criteria are capital
requirements and meaningful participation in the Treasury auctions.
Primary Market
Market of new issues of securities.
Prime Rate
Interest rate charged by major banks to their most creditworthy customers.
Producer Price Index (PPI)
An index that shows the cost of resources needed to produce manufactured goods
during the previous month.
Pulpit
A raised structure adjacent to, or in the center of, the pit or ring at a
futures exchange where market reporters, employed by the exchange, record price
changes as they occur in the trading pit.
Purchasing Hedge (or Long Hedge)
Buying futures contracts to protect against a possible price increase of cash
commodities that will be purchased in the future. At the time the cash
commodities are bought, the open futures position is closed by selling an equal
number and type of futures
Purchasing Power
Total Trade Equity minus Initial Margin. Your purchasing power represents funds
available to you to establish new positions. Your purchasing power changes
throughout the day as your total trade equity and margins change. If you have
options positions, margin amounts are based on a calculation of total portfolio
risk.
Put
An option to sell a commodity, security, or futures contract at a specified
price at any time between now and the expiration of the option contract.
Put Option
An option that gives the option buyer the right but not the obligation to sell
(go "short'') the underlying futures contract at the strike price on or
before the expiration date.
Rally
An upward movement of prices following a decline; the opposite of a reaction.
Reaction
A decline in prices following an advance. The opposite of rally.
Reciprocal of European Terms
One method of quoting exchange rates, which measures the U.S. dollar value of
one foreign currency unit, i.e., U.S. dollars per foreign units. See European
Terms.
Registered Representative
A person employed by, and soliciting business for, a commission house or Futures
Commission Merchant.
Repurchase Agreements (or Repo)
An agreement between a seller and a buyer, usually in U.S. government
securities, in which the seller agrees to buy back the security at a later date.
Reserve Requirements
The minimum amount of cash and liquid assets as a percentage of demand deposits
and time deposits that member banks of the Federal Reserve are required to
maintain.
Resistance
A level above which prices have had difficulty penetrating.
Reverse Crush Spread
The sale of soybean futures and the simultaneous purchase of soybean oil and
meal futures. See Crush Spread.
Round-Turn
Procedure by which a long or short position is offset by an opposite transaction
or by accepting or making delivery of the actual financial instrument or
physical commodity.
Runners
Messengers who rush orders received by phone clerks to brokers for execution in
the pit.
Scalp
To trade for small gains. Scalping normally involves establishing and
liquidating a position quickly, often within just a few minutes.
Scalper
(See Scalp)
Secondary Market
Market where previously issued securities are bought and sold.
Securities on Deposit
Treasury-bills and other government interest-bearing coupons that you may have
in your SGI trading account.
Short Options Value
The total cost of purchasing back all short options on a marked-to-market basis.
Sell (Sell Order)
An offer. This transaction type indicates to sell or to go short. Opposite of
buy or go long.
Sell Spread (Option sell spread)
The transaction type you choose to indicate an option sell spread.
Selling Hedge (or Short Hedge)
Selling futures contracts to protect against possible declining prices of
commodities that will be sold in the future. At the time the cash commodities
are sold, the open futures position is closed by purchasing an equal number and
type of futures contracts as those that were initially sold. See Hedging.
Settlement Price
The last price paid for a commodity on any trading day. The exchange
clearinghouse determines a firm's net gains or losses, margin requirements, and
the next day's price limits, based on each futures and options contract
settlement price. If there is a closing range of prices, the settlement price is
determined by averaging those prices. Also referred to as settle or closing
price.
Short
(noun) One who has sold futures contracts or plans to purchase a cash commodity.
(verb) Selling futures contracts or initiating a cash forward contract sale
without offsetting a particular market position.
Short Hedge
The sale of a futures contract in anticipation of a later cash market sale. Used
to eliminate or lessen the possible decline in value of ownership of an
approximately equal amount of the cash financial instrument or physical
commodity. (See hedge, long hedge.)
Simulated Trading
The process of buying and selling without actually entering the market or
risking any real funds.
Speculator
One who attempts to anticipate price changes and, through buying and selling
futures contracts, aims to make profits. A speculator does not use the futures
market in connection with the production, processing, marketing or handling of a
product.
Spot
Usually refers to a cash market price for a physical commodity that is available
for immediate delivery.
Spread
The price difference between two related markets or commodities.
Spreading
The simultaneous buying and selling of two related markets in the expectation
that a profit will be made when the position is offset. Examples include: buying
one futures contract and selling another futures contract of the same commodity
but different delivery month; buying and selling the same delivery month of the
same commodity on different futures exchanges; buying a given delivery month of
one futures market and selling the same delivery month of a different, but
related, futures market.
Steer/Corn Ratio
The relationship of cattle prices to feeding costs. It is measured by dividing
the price of cattle ($/hundredweight) by the price of corn ($/bushel). When corn
prices are high relative to cattle prices, fewer units of corn equal the dollar
value of 100 pounds of cattle. Conversely, when corn prices are low in relation
to cattle prices, more units of corn are required to equal the value of 100
pounds of beef. See Feed Ratio.
Stock Index
An indicator used to measure and report value changes in a selected group of
stocks. How a particular stock index tracks the market depends on its
composition the sampling of stocks, the weighting of individual stocks, and the
method of averaging used to establish an index.
Stock Market
A market in which shares of stock are bought and sold.
Stop with Limit (STWL)
A variation of a stop order. A stop with limit order to buy becomes a limit
order when the futures contract trades (or is bid) at or above the stop price. A
stop order to sell becomes a limit order when the futures contract trades (or is
offered) at or below the stop price.
Stop Close Only (SCO)
A time sensitive variation of a stop order. Order is only worked as a stop
during the closing range.
Stop Open Only (SOO)
A time sensitive variation of a stop order. Order is only worked as a stop
during the opening range.
Stop (STOP)
An order to buy or sell when the market reaches a specified point. A stop order
to buy becomes a market order when the futures contract trades (or is bid) at or
above the stop price. A stop order to sell becomes a market order when the
futures contract trades (or is offered) at or below the stop price. An order to
buy or sell at the market when and if a specified price is reached.
Stop Limit (STL)
A variation of a stop order. A stop with limit order to buy becomes a limit
order at the stop price when the futures contract trades (or is bid) at or above
the stop price. A stop order to sell becomes a limit order at the stop price
when the futures contract trades (or is offered) at or below the stop price.
Strike Price
The price at which the holder (buyer) may purchase or sell the underlying
futures contract upon the exercise of an option.
Support
The place on a chart where the buying of futures contracts is sufficient to halt
a price decline.
Technical Analysis
Anticipating future price movement using historical prices, trading volume, open
interest, and other trading data to study price patterns.
Tick
The smallest allowable increment of price movement for a contract. Also referred
to as minimum price fluctuation.
Time and Sales
The registered times of prices traded and bid and offers on a given market.
Time Limit Order
A customer order that designates the time during which it can be executed.
Time Value
The amount of money option buyers are willing to pay, above the intrinsic value,
for an option in the anticipation that, over time, a change in the underlying
futures price will cause the option to increase in value. In general, an option
premium is the sum of time value and intrinsic value. Any amount by which an
option premium exceeds the option's intrinsic value can be considered time
value. Also referred to as extrinsic value.
Time-Stamped
Part of the order-routing process in which the time of day is stamped on an
order.
TOPS
Trade Order Processing System. TOPS is an electronic order entry, routing, and
fill reporting system that expedites the flow of orders from a firm's desk or
directly from its customers. To its exchange floor operations. It is jointly
owned by the CME and the CBOT - member firms are currently using TOPS Route at
both exchanges. The system enables its users to improve the speed and accuracy
of order processing. Because the system electronically routes orders and fills,
TOPS greatly reduces the telephone calls between customers, order desks, and the
trading floor. In addition to routing, the system generates fill reports and
transmits trade records to member firms' back office systems. TOPS order status
inquiry and open order management features offer an efficient means for firms to
manage their open orders.
Total Trade Equity
Cash Balance combined with Open Trade Equity on a marked-to-market basis.
Trade Balance
The difference between the value of a nation's imports and exports of
merchandise.
Trend
The general direction of the market.
Underlying Futures Contract
The specific futures contract that is bought or sold by exercising an option.
U.S. Treasury Bill
A short-term U.S. government debt instrument with an original maturity of one
year or less. Bills are sold at a discount from par with the interest earned
being the difference between the face value received at maturity and the price
paid.
U.S. Treasury Bond
Government-debt security with a coupon and original maturity of more than 10
years. Interest is paid semiannually.
U.S. Treasury Note
Government-debt security with a coupon and original maturity of one to 10 years.
Variable Limit
An expanded allowable price range set during volatile markets.
Variation Margin
During periods of great market volatility, or in the case of high-risk accounts,
additional margin deposited by a clearing member firm to an exchange
clearinghouse.
Vertical Spread
Buying and selling puts or calls of the same expiration month but different
strike prices
Volatility
A measurement of the change in price over a given time period. It is often
expressed as a percentage and computed as the annualized standard deviation of
percentage change in daily price.
Volume
The number of transactions in a futures or options on futures contract made
during a specified period of time.
Warehouse Receipt
Document guaranteeing the existence and availability of a given quantity and
quality of a commodity in storage; commonly used as the instrument of transfer
of ownership in both cash and futures transactions.
Writer
An individual who sells an option.
Yield
A measure of the annual return on an investment.
Yield Curve
A chart in which the yield level is plotted on the vertical axis and the term to
maturity of debt instruments of similar creditworthiness is plotted on the
horizontal axis. The yield curve is positive when long-term rates are higher
than short-term rates
Yield to Maturity
The rate of return an investor receives if a fixed-income security is held to
maturity.
Disclaimer
The information contained on this website is not to be
construed as an offer to sell or a solicitation or an offer to buy the
commodities herein named. The risk of trading futures and options can be
substantial. Each investor must consider whether this is a suitable investment.
Past performance is not indicative of future results.
Read Entire Disclaimer
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