An actual physical commodity which is delivered at the completion of a contract, as opposed to a futures contract on that commodity. A futures contract will specify the number of units of the cash commodity that must be delivered, and also the specific features of the cash commodity. See cash commodity.
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.
See Exchange for Physical
All or None Order
An order which must be filled for the full size of the order before it can be executed.
An option contract that may be exercised at any time between the date of purchase and the expiration date.
The purchase of a commodity against the simultaneous sale of a commodity to profit from unequal prices. The two transactions may take place on different exchanges, between two different commodities, in different delivery months, or between the cash and futures markets.
Ask: The price at which a seller will sell a futures contract.
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).
An option with a strike price that is equal, or approximately equal, to the current market price of the underlying futures contract.
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.
A chart that graphs the high, low, and settlement prices for a specific trading session over a given period of time.
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 Market (bear/bearish)
When prices are declining, the market is said to be a "bear market"; individuals who anticipate lower prices are "bears." A traders that expects falling prices is said to be "bearish."
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.
An expression indicating a desire to buy a futures contract at a given price; opposite of offer. Or the price at which a product can be sold immediately without dispute or negotiation.
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.
A swift downward move in price.
A company or individual that executes futures and options orders on behalf of financial and commercial institutions and/or the general public.
See Commission Fee.
See Futures Commission Merchant.
Bull Market (bull/bullish)
When prices are rising, the market is said to be in a "bull market"; individuals who anticipate higher prices are considered "bulls. "A trader that expects rising prices is said to be "bullish".
This spread is achieved when buying the nearby month, and selling the deferred month, to profit from the change in the price relationship. I.e. Buy one June'07 Crude Oil contract & Sell one September'07 Crude Oil Contract in March'07. Why? Summer driving season should increase demand for near term oil, while demand at summers end will begin to dwindle.
Typically used as a low risk, limited reward options strategy that is built with 4 trades with one common expiration and three different strike prices. When done in the correct way, potential upside is greater than potential downside. I.e. Buy one Oct07 60 Call & one Oct07 70 call, while selling two Oct07 65 calls. Maximum profit is achieved if the underlying market is trading around the middle price at expiration of these options (mid-October 2007). Maximum loss is realized if the underlying is trading below the lowest strike or above the highest strike at expiration.
The simultaneous sale and purchase of either calls or puts with the same strike price but different expiration months. This spread can also be implemented with outright futures.
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.
An order that will delete or cancel a previous order placed by the client.
For physical commodities like grains or metals, it is the cost of storage, insurance, and financing which is incurred for holding the physical commodity. In interest rate futures markets, it refers to the differential between the yield on a cash instrument and the cost of funds necessary to buy the instrument. Also referred to as cost of carry or carry.
Grain and oilseed commodities not consumed during the market year that remain in storage at year's end. These stocks are "carried over" into the next market year and are added to the stocks produced during that next crop year.
An actual physical commodity someone is buying or selling, I.e., soybeans, corn, gold, oil, Treasury notes, etc. See actual.
A sales agreement for either immediate or future delivery of the actual product.
A place where producers/ wholesalers/ end-users buy and sell the actual commodities, i.e., grain elevator, bank, etc.
Transactions generally involving index-based futures contracts which are settled in cash on the last trading day for that index, based on the last traded price for that index. This is in contrast to those markets that specify the delivery of a commodity or financial instrument.
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 candlestick 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.
Clearing a trade
The process by which a clearing clears all executed trades. In order to settle prices at the end of each trading day, the clearing house must match all buys to all sells. Once an executed buy is matched to an executed sell and the respective accounts are debited or credited the transaction, the trade is said to be 'cleared'.
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.
A member of an exchange 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.
See Settlement Price.
A range of prices at which buy and sell transactions took place during the final one to two minutes of trading.
A transaction in which at some point prior to expiration, the option holder makes an offsetting sale of an identical option, or the option writer makes an offsetting purchase of an identical option. A closing transaction in an option reduces or cancels out an investor's previous position as the holder or the writer of that option.
A fee charged by a broker for executing a transaction. Also referred to as brokerage fee.
See Futures Commission Merchant (FCM).
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.
Commodity Credit Corporation (CCC)
A branch of the U.S. Department of Agriculture, established in 1933, that supervises the government's farm loan and subsidy programs.
Commodity Futures Trading Commission (CFTC)
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.
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.
See Deliverable Grades.
See Delivery Month.
A term referring to cash and futures prices tending to come together (i.e., the basis approaches zero) as the futures contract nears expiration.
Cost of Carry (or Carry)
See Carrying Charge.
In finance, coupons are "attached" to bonds, either physically (as with old-school bonds) or electronically as with present day bonds. Each coupon represents a predetermined payment promised to the bond-holder in return for his or her loan of money to the bond-issuer. The bond-holder is typically not the original lender, but receives this payment for effectively lending the money. The coupon rate (the amount promised per dollar of the face value of the bond) helps determine the interest rate or yield on the bond.
Covered Call Option Writing
A strategy in which one sells call options while simultaneously owning an equivalent position in the underlying security
Covered Put Option Writing
A strategy in which one sells puts and simultaneously is short an equivalent position in the underlying security.
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.
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.
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).
By simultaneously purchasing soybean futures and selling soybean meal futures, a trader is attempting to establish an artificial position in the processing of soybeans, created through the spread. See Reverse Crush.
The right to buy or sell one currency against another currency at a specified price during a specified period.
Daily Trading Limit
The maximum price range set by the exchange each day for a contract. Day Traders: Speculators who take positions in futures or options contracts and liquidate them prior to the close of the same trading day.
An order which remains in effect only until executed or until the end of the trading session.
1) Generally, legal IOUs created when one person borrows money from (becomes indebted to) another person; 2) Any commercial paper, bank CDs, bills, bonds, etc.; 3) A document evidencing a loan or debt. Debt instruments such as T-Bills and T-Bonds are traded on the CME and CBOT, respectively.
Deferred (Delivery) Month
The more distant month(s) in which futures trading is taking place, as distinguished from the nearby (delivery) month.
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. Also referred to as contract grades.
The transfer of the cash commodity from the seller of a futures contract to the buyer of a futures contract. Each futures exchange has specific procedures for delivery of a cash commodity. Some futures contracts, such as stock index contracts, are cash settled.
The third day in the delivery process when the buyer's clearing firm presents the delivery notice with a certified check for the amount due at the office of the seller's clearing firm.
A specific month in which delivery may take place under the terms of a futures contract. Also referred to as contract month.
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.
The ratio that compares the change in price of the underlying asset with the change in price of its derivative (future contract). If a call option has a delta of .83, then for every $1 that the underlying asset increases, the call option will increase by $.83. For a put option it will be negative or the value of the option will decrease. A put with a delta of -.83 will decrease by $.83 for every $1 that the underlying increases in price. When a in-the-money call nears expiration its delta will approach 1.00 & an in-the-money put at expiration will approach a delta of -1.00
Law of Demand
Demand exhibits a direct relationship to price. If all other factors remain constant, an increase in demand leads to an increased price, while a decrease in demand leads to a decreased price.
Price differences between classes, grades, and delivery locations of various stocks of the same commodity.
In the open-outcry arena, edge is simply buying the on the current bid or selling on the current offer. On the screen, edge is a matter of perception. Each trader creates his/her own edge, usually as a result of developing a trading process that is unique to them and their perception of the market at any given time.
The market price at which the quantity supplied equals the quantity demanded.
U.S. dollars that are on deposit with banks 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.
An option contract that may be exercised only during a specified period of time just prior to expiration
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 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.
An action taken by the holder of a call option if he/she wishes to purchase the underlying futures contract at the strike price; or by the holder of a put option if he wishes to sell the underlying futures contract at the strike price.
See Strike Price.
Exercise Settlement Amount
The difference between the exercise price of the option and the exercise settlement value of the index on the day an exercise notice is tendered, multiplied by the index multiplier.
Expanded Trading Hours
Additional trading hours of specific futures and options contracts at a futures exchange that overlap with business hours in other time zones.
An expiration cycle relates to the dates on which options on a particular underlying security expire. A given option, other than LEAPSwill be assigned to one of three cycles, the January cycle, the February cycle or the March cycle.
Options on futures generally expire on a specific date during the month preceding the futures contract delivery month. For example, an option on a March futures contract expires in February but is referred to as a March option because its exercise would result in a March futures contract position.
The time of day by which all exercise notices must be received on the expiration date.
Difference between an option's price and its intrinsic value. I.e. an option with a premium price of $10 & an intrinsic value of $5, has an extrinsic value of $5. The extrinsic or time value of an option declines as the expiration date approaches.
A ratio used to express the relationship of feeding costs to the dollar value of livestock. See Hog/Corn Ratio and Steer/Corn Ratio.
A customer order that is a price limit order that must be filled immediately or canceled.
Include interest rate futures, currency futures, and index futures. The financial futures market currently is the fastest growing of all the futures markets.
There are two basic types: (1) a debt instrument, which is a loan with an agreement to pay back the principal with interest (coupon payments); (2) an equity security, which is a share of stock in a company.
First Notice Day
According to Chicago Board of Trade rules, 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 sellers who they have been matched up with.
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.
An individual who executes trades for the purchase or sale of any commodity futures or options contract on any contract market for such individual's own account.
Forex Market or Foreign Exchange Market
An over-the-counter market where buyers and sellers conduct foreign exchange business by telephone and other means of communication.
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.
The study of specific factors, such as weather, wars, discoveries, and changes in government policy, which influence supply and demand and, consequently, prices in the market place.
Futures Commission Merchant (FCM)
An individual or organization that solicits or accepts orders to buy or sell futures contracts or options on futures and accepts money or other assets from customers to support such orders.
A legally binding agreement, made on the trading floor or the trading screen of a futures exchange, to buy or sell a commodity or financial instrument at some point in the future. Futures contracts are standardized according to quality, quantity, delivery time and location. These specifications are unique for every product type. The only variable is price, which is discovered on an exchange trading floor or via a electronic trading screen.
A central marketplace with established rules and regulations where buyers and sellers meet to trade futures and options on futures contracts.
A global electronic trading environment created by the Chicago Mercantile Exchange (CME). A permitted trader can trade CME or NYMEX products thru the GLOBEX system.
An order which remains in active until it is cancelled, executed, or the contract expires.
The largest of grain elevator facilities with the capacity to ship grain by rail and/or barge to domestic and foreign marketplaces.
Gross Domestic Product (GDP)
The monetary value of all the finished goods and services produced within a country's borders during a specific time period, though GDP is usually calculated on an annual basis, it is released quarterly. It includes private and public consumption, government outlays, investments and exports less imports that occur within a defined economy.
Gross National Product (GNP)
An economic statistic that includes GDP, plus any income earned by citizens working overseas, minus income earned within the domestic economy by overseas residents.
Gross Processing Margin (GPM)
The difference between the cost of soybeans and the combined sales income of the processed soybean oil and meal.
An individual or company owning or planning to own a cash commodity like corn, soybeans, wheat, U.S. Treasury bonds, notes, bills, etc. that is concerned 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 or 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.
Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract
The highest price of the day for a particular futures contract.
A trader is said to be "hitting" the bid when he/she initiates a trade that sells directly to the bid quantity. This trader probably believes that the contract price will fall & is willing to give the perceived edge to another trading by selling into his/her bid.
The relationship of feeding costs to the dollar value of hogs. It is measured by dividing the price of hogs ($/hundredweight) by the price of corn ($/bushel). When corn prices are high relative to pork prices, fewer units of corn will equal the dollar value of 100 pounds of pork. Conversely, when corn prices are low in relation to pork prices, more units of corn are required to equal the value of 100 pounds of pork. See Feed Ratio.
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.
Immediate or cancel order (IOC)
An order requiring that all or part of the order be executed immediately after it has been brought to the market. Any portions not executed immediately are automatically cancelled.
The creation of money by monetary authorities. In more popular usage, the creation of money that visibly raises goods prices and lowers the purchasing power of money. It may be creeping, trotting, or galloping, depending on the rate of money creation by the authorities. It may take the form of "simple inflation," in which case the proceeds of the new money issues accrue to the government for deficit spending; or it may appear as "credit expansion," in which case the authorities channel the newly created money into the loan market. Both forms are inflation in the broader sense.
The percentage of the purchase price of any security, that can be purchased on margin, that the investor must pay with his/her own cash or other marketable assets.
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.
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 a calendar 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.
An option having 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.
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.
Market indicators showing the general direction of the economy and confirming or denying the trend implied by the leading 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).
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.
A trader is said to be "lifting" the offer when he/she initiates a trade that buys directly from the best offered price. This trade likely believes that the contract price will rise & is willing to give up the perceived edge to another trader by buying from his/her offer.
The increase or decrease of a price by the maximum amount allowed for any one product for any one trading session. These price limits are established by the exchanges, and approved by the CFTC. They vary from contract to contract. See price limit.
A customer sets a limit on price or time of execution of a trade, or both; for example, a "buy limit" order is placed below the market price. A "sell limit" order is placed above the market price. A sell limit is executed only at the limit price or higher (better), while the buy limit is executed at the limit price or lower (better).
See Position Limit, Price Limit, Limit Move, and Variable Limit.
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 markets with high amounts of liquidity so their trading activity does not influence the market price.
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.
The amount lent per unit of a commodity to farmers.
Floor & screen-based traders who trade primarily for their own account. Locals, like speculators, provide liquidity to the market so hedgers can transfer price risk.
One who has bought futures contracts or owns a cash commodity. See Purchasing Hedge.
A hedger who is short the cash (needs the cash commodity) buys a futures contract to hedge his future needs. By buying a futures contract when he is short the cash, he is entering a long hedge. A long hedge is also known as a substitute purchase or an anticipatory hedge.
The lowest price of the day for a particular futures contract.
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.
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.
An order to buy or sell futures of a given delivery month to be filled at the best possible price and as soon as possible. Time is of primary importance in the case of a market order.
Market Profile is a graphical organization of price and time information. Market Profile displays price on the vertical axis and time on the horizontal axis. Letters are used to symbolize time brackets. Market profile is an analytical decision support tool for traders and is not to be considered a trading system.
The act of recording the price or value of a security, portfolio or account to reflect its current market value rather than its book value.
Minimum Price Fluctuation
Smallest increment of price movement possible in trading a given contract. Also called a point or a tick.
A statistical price analysis method of recognizing different price trends. A moving average is calculated by adding the prices for a predetermined number of days and then dividing by the number of days.
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; the NFA screens futures professionals for membership, audits and monitors professionals for financial and general compliance rules, and provides arbitration of futures-related disputes.
Nearby (Delivery) Month
The futures contract month closest to expiration. Also referred to as spot or front month.
The difference between total open long and total open short position in any one or all combined futures contract months held by an individual or entity.
A day on which notices of intent to deliver pertaining to a specified delivery month may be issued. See First Notice Day.
An expression indicating one's desire to sell a commodity at a given price; opposite of bid. Or, the price at which a given product can be purchased immediately with no dispute or negotiation.
The Organization of Petroleum Exporting Countries (OPEC) is a cartel made up of Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela; since 1965 its international headquarters have been in Vienna, Austria. Its principal aim is "the coordination and unification of the petroleum policies of its member countries and the determination of the best means for safeguarding their interests, individually and collectively; devising ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations; giving due regard at all times to the interests of the producing nations and to the necessity of securing a steady income to the producing countries; an efficient, economic and regular supply of petroleum to consuming nations, and a fair return on their capital to those investing in the petroleum industry."(Chap 1, Art. 2; Statute of OPEC)
For futures, the total number of contracts not yet liquidated by offset or delivery; i.e., the number of contracts outstanding. Open interest is determined by counting the number of transactions on the market (either the total contracts bought or sold, but not both). For futures options, the number of calls or puts outstanding; each type of option has its own open interest figure.
Open Market Operation
The buying and selling of government securities Treasury bills, notes, and bonds by the Federal Reserve.
Method of public auction for making verbal bids and offers on the trading floors of the many futures exchanges.
A contract that conveys the right, but not the obligation, to buy or sell a particular item at a certain price for a limited time. Only the seller of the option is obligated to perform.
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.
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.
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 of the option.
The simultaneous purchase and sale of one or more options contracts, futures, and/or cash positions.
See Option Seller.
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.
A term used to describe a market where prices have risen relatively quickly-too quickly to be justified by the underlying fundamental factors.
A term used to describe a market in where prices have dropped faster than the underlying fundamental factors would suggest they should.
P&S (Purchase and Sale) Statement
A statement sent by a commission house to a customer when his futures or options on futures position has changed, 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.
Payment-In-Kind (PIK) Program
A government program in which farmers who comply with a voluntary acreage-control program and set aside an additional percentage of acreage specified by the government receive certificates that can be redeemed for government-owned stocks of grain.
Performance Bond Margin
The amount of money deposited by both a buyer and seller of a futures contract or an options seller to ensure performance of the term of the contract. Margin in commodities is not a payment of equity or down payment on the commodity itself, but rather it is a security deposit.
The area on the 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.
A chart that plots day-to-day price movements without taking into consideration the passage of time. Point and figure charts are composed of a number of columns that consist of either a series of stacked Xs or a series of stacked Os. A column of Xs is used to illustrate a rising price, while Os represent a falling price. As you can see from the chart below, this type of chart is used to filter out non-significant price movements, and enables the trader to easily determine critical support and resistance levels. Traders will place orders when the price moves beyond identified support/resistance levels.
A market commitment. A buyer of a futures contract is said to have a long position while, a seller of futures contracts is said to have a short position.
A predetermined position level set by regulatory bodies for a specific contract or option. Limits are created in order to maintain stable and fair markets. Each option or futures contract type will have differing position limits.
A trading strategy where the trader either buys or sells a market product and holds the position for an extended period of time.
The process of determination of market prices through the interactions of buyers and sellers in a free marketplace.
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.
Price Limit Order
A customer order that specifies the price at which a trade can be executed. Also called a limit order.
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, consistent participation in the Treasury auctions.
The part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is called an initial public offering (IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus.
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 contracts as those that were initially purchased. See Long Hedge.
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.
A swift upward movement in price
The price span during a given trading session, week, month, year, etc.
Repurchase Agreements (or Repo)
A repurchase agreement is an agreement between two parties where one party sells the other a security at a specified price with a commitment to buy the security at a later date for another specified price. Most repos are overnight transactions, with the sale taking place one day & then reversed the next. Long-term repos, or term repos, can last as long as a month or even more.
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 at all times.
A horizontal price range where price hovers due to selling pressure before attempting a downward move.
Reverse Crush Spread
The sale of soybean futures and the simultaneous purchase of soybean oil and meal futures. See Crush Spread.
A trader who trades for small, short-term profits during the course of a trading session, rarely carrying a position overnight. A professional scalper will typically make 100 or more trades each day.
The financial market for trading of securities that have already been issued in an initial private or public offering. The secondary market can also refer to the market for any kind of used goods. The market that exists in a new security just after the new issue, is often referred to as the aftermarket. Once a newly issued stock is listed on a stock exchange, investors and speculators can easily trade on the exchange, as market makers provide bids and offers in the new stock.
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. I.e. when a hedger has a long cash position (holding an inventory or growing a crop) he enters a short hedge by selling a futures contract. A sell or short hedge is also known as a substitute sale.
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 the settle or closing price.
All option contracts of the same class that also has the same expiration date and strike price.
One who has sold futures contracts or plans to purchase a cash commodity. Selling futures contracts or initiating a cash forward contract sale without offsetting a particular market position.
A market participant who tries to profit from buying and selling futures and options contracts by anticipating future price movements. Speculators assume market price risk and add liquidity and capital to the futures markets.
Usually refers to a cash market price for a physical commodity that is available for immediate delivery.
See Nearby (Delivery) Month.
The price difference between two related markets or commodities.
The simultaneous buying and selling of two correlated market products with 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.
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 Futures
Based on stock market indexes, including Standard and Poor's 500, Value Line, NYSE Composite, Nikkei 225, the Major Market Index, and the Over-the-Counter Index, these instruments are used by investors concerned with price changes in a large number of stocks, or with major long-term trends in the stock market indexes. Stock index futures are settled in cash and are generally quoted in ticks of .05. To determine the contract value, the quote is generally multiplied by $500.
A variation of a stop order in which a trade must be executed at the exact price or better. If the order cannot be executed, it is held until the stated price or better is reached again.
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.
When a stop order has been activated and the position has been offset, the trader/investor is said to have been "stopped out".
The simultaneous sale or purchase of both a call and a put with the same expiration month and with the same strike price. A straddle is a good strategy if you believe that price will move significantly, but are not sure which way its going to go. In order to profit, the price must make a significant move
The simultaneous sale or purchase of both a call and a put with the same expiration month and different strike prices. This strategy is profitable only if there is a large move in either direction. A strangle is usually less expensive than a straddle because the option are out of the money.
The stated price per share for which underlying stock may be purchased (for a call) or sold (for a put) by the option holder upon exercise of the option contract. Also known as exercise price.
Law of Supply
Supply exhibits an inverse relationship to price. If all other factors hold constant, an increase in supply causes a decreased price, while a decrease in supply causes an increased price.
A horizontal price range where price hovers due to buying pressure before attempting a upward move.
Technical analysis uses charts to examine changes in price patterns, volume of trading, open interest, and rates of change to predict and profit from trends. Someone who follows technical rules (called a technician) believes that prices will anticipate changes in fundamentals.
The smallest allowable increment of price movement for a contract. Also referred to as minimum price fluctuation.
Time and Sales
A service that transmits price and time information for trading throughout the day.
Part of the order-routing process in which the time of day is stamped on an order. An order is time-stamped when it is (1) received on the trading floor, and (2) then again when it has been filled or cancelled.
The amount of money option buyers are willing to pay 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.
The difference between a nation's import & export of goods to and from other countries.
The prices traded between the high & low for a specific time period (day, week, month, contract life, etc)
See U.S. Treasury Bill.
See U.S. Treasury Bond.
See U.S. Treasury Note.
A significant price movement one direction or another. Trends may go either up or down or even sideways. Uptrend, Downtrend, Sideways trend.
The classification of an option contract as either a put or a call.
Uncovered Call Option Writing
A short call option position in which the writer does not own an equivalent position in the underlying security represented by their option contracts. Risk, in this case, is unlimited as the price of the underlying asset has no upside limit.
Uncovered Put Option Writing
A short put option position, in which the writer does not have a corresponding short position in the underlying security or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the put. Risk, in this case, is limited to the price of the underlying falling to zero.
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 semiannual basis via its coupon.
U.S. Treasury Note
Government-debt security with a coupon and original maturity of one to 10 years. Interest is paid via its coupon.
A variable margin payment that is made by clearing members to their respective clearing houses based upon adverse price movements of the futures contracts that these members hold.
Buying and selling puts or calls of the same expiration month but different strike prices.
A measure for 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.
The number of shares or contracts traded in a security or an entire market during a given period of time. It is simply the amount of shares that trade hands from sellers to buyers as a measure of activity. If a buyer of a futures contract purchases 100 contracts from a seller, then the volume for that period increases by 100 contracts based on that transaction.
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.
See Futures Commission Merchant (FCM).
See Option Seller.
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