Futures Trading Terms:
A glossary of the Commodity Futures Trading Corporation contains a glossary of trading terms complied from generally accepted trade sources. Major terms explained in this glossary are reproduced here.
Abandon: The act of an option holder in electing not to exercise or offset an option.
Actuals: The physical or cash commodity.
Aggregation: The principle under which all futures positions owned or controlled by one trader (or group of traders acting in concert) are combined to determine reporting status and speculative limit compliance.
Arbitrage: Simultaneous purchase of cash commodities or futures in one market against the sale of cash commodities or futures in the same or a different market to profit from a discrepancy in prices.
At-the-market: An order to buy or sell a futures contract at whatever price is obtainable when the order reaches the trading floor. Also called a Market Order.
At-the-money: When an option's exercise price is the same as the current trading price of the under-lying commodity.
Backpricing: Fixing the price of a commodity for which the commitment to purchase has been made in advance.
Backwardation: Market situation in which futures prices are progressively lower in the distant delivery months.
Basis: The difference between the spot or cash price of a commodity and the price of the nearest futures contract for the same or a related commodity. Basis is usually computed in relation to the near futures contract and may reflect different time periods, product forms, qualities, or locations.
Basic grade: The grade of a commodity used as the standard or par grade of a futures contract.
Basis risk: The risk associated with an unexpected widening or narrowing of basis between the time a hedging position is established and the time that it is lifted.
Bid: An offer to buy a specific quantity of a commodity at a stated price.
Blackboard trading: The practice of selling commodities from a blackboard on a wall of a commodity exchange.
Black-Scholes (Option Pricing) Model: An option pricing formula initially derived by F. Black and M. Scholes for securities options and later refined by Black for options on futures.
Board of trade: Any exchange or association, whether incorporated or unincorporated, of persons who are engaged in the business of buying or selling any commodity or receiving the same for sale on consignment.
Boiler room: An enterprise which often is operated out of inexpensive low-rent quarters (hence the term "boiler room") that uses high pressure sales tactics (generally over the telephone) and possibly false or misleading information in an attempt to get unsophisticated investors to invest in questionable commodity or stock transactions.
Box transaction: An option position in which the holder has established a long call and a short put at one strike price and a short call and a long put at another strike price, all of which are in the same contract month in the same commodity.
Bucketing: Directly or indirectly taking the opposite side of a customer's order into the broker's own account or into an account in which the broker has an interest, without execution of the order on an exchange.
Bulge: A rapid advance in prices.
Bull spread: The simultaneous purchase and sale of two futures contracts in the same or related commodities with the intention of profiting from a rise in prices but at the same time limiting the potential loss if this expectation is wrong.
Buoyant: A market in which prices have a tendency to rise easily with a considerable show of strength.
Butterfly spread: A three-legged spread in futures or options. In the options spread, the options have the same expiration date but differ in strike prices.
Buy (or sell) on close: To buy (or sell) at the end of the trading session within the closing price range.
Buy (or sell) on opening: To buy (or sell) at the beginning of a trading session within the opening price range.
Call: (1) A period at the opening and the close of some futures markets in which the price for each futures contract is established by auction; (2) buyer's call generally applied to cotton, also called "call sale."
Called: Another term for "exercised" when the option is a call. The writer of a call must deliver the indicated underlying commodity when the option is exercised or called.
Call option: A contract that entitles the buyer/taker to buy a fixed quantity of a commodity at a stipulated basis of striking price at any time up to the expiration of the option. The buyer pays a premium to the seller/grantor for this contract. A call option is bought with the expectation of a rise in prices.
Call rule: An exchange regulation under which an official bid price for a cash commodity is competitively established at the close of each day's trading. It holds until the next opening of the exchange.
Cash commodity: The physical or actual commodity as distinguished from the futures contract, e.g., actuals.
Cash market: The market for the cash commodity.
CFO: Cancel former Order.
Certified or Certified stocks: Stocks of a commodity that have been duly inspected and found to be of a quality deliverable against futures contracts, stored at the delivery points designated as regular or acceptable for delivery by the commodity exchange.
Churning: Excessive trading which permits a broker who controls an account to earn excessive commissions while disregarding the best interests of the customer.
Class (of options): Options of the same type covering the same underlying futures contract or physical commodity.
Clearing house: An agency associated with an exchange which guarantees all trades, assuring contract delivery and/or financial settlement. the clearinghouse becomes the buyer for every seller, and the seller for every buyer.
Closing-out: Liquidating an existing long or short futures or option position with an equal and opposite transaction. An offset.
Combination: Puts and calls held either long or short with different strike prices and expirations.
Commodity Credit Corporation: A government-owned corporation established in 1933 to assist American agriculture. Major operations include price support programs, foreign sales, and export credit programs for agricultural commodities.
Commodity Exchange Authority: A regulatory agency of the U.S. Department of Agriculture established to administer the Commodity Exchange Act prior to 1975; the forerunner of the Commodity Futures Trading Commission.
Commodity Futures Trading Commission: The Federal regulatory agency established by the CFTC Act of 1974 to administer the Commodity Exchange Act.
Commodity Price Index: Index or average, which may be weighted, of selected commodity prices, intended to be representative of the markets in general or a specific subset of commodities.
Contango: Market situation in which prices in succeeding delivery months are progressively higher than the nearest delivery month.
Contract: A term of reference describing a unit of trading for a commodity future or option: an agreement to buy or sell a specified commodity.
Contract month: The month in which futures contracts may be satisfied by making or taking delivery.
Convergence: The tendency of prices of physical and futures to approach one another, usually during the delivery month.
Conversion: When trading options on futures contracts, a position created by selling a call option, buying a put option, and buying the underlying futures contract, where the options have the same strike price and the same expiration.
Corner: To corner is to secure such relative control of a commodity or security that its price can be manipulated.
Cover: Purchasing futures to offset a short position. To have in hand the physical commodity when a short futures or leverage sale is made, or to acquire the commodity that might be deliverable on a short sale.
Covered option: A short call or put option position which is covered by the sale or purchase of the underlying futures contract or physical commodities.
Cox-Ross-Rubinstein Options Pricing Model: An option-pricing logarithm developed by J. Cox, S. Ross and M. Rubinstein which can be adopted to include effects not included in the Black-Scholes model.
Cross-trading: Offsetting or noncompetitive match of the buy order of one customer against the sell order of another, a practice that is permissible only when executed as required by the Commodity Exchange Act, CFTC regulations, and rules of the contract market.
Curb trading: The dealing that takes place after the official market has closed.
Day order: An order that expires automatically at the end of each day's trading session.
Day traders: Commodity traders who take positions in commodities and then offset them prior to the close of trading on the same trading day.
Default: Failure to perform on a futures contract as required by exchange rules.
Delivery: The tender and receipt of the actual commodity, the cash value of the commodity, or of a delivery instrument covering the commodity.
Delivery notice: The written notice given by the seller of his intention to make delivery against an open short futures position on a particular date.
Delivery price: The price fixed by the clearing house at which deliveries on futures are invoiced.
Diagonal spread: A spread between two call options on two put options with different strike prices and different expiation dates.
Differentials: The discounts (premiums) allowed for grades or locations of a commodity lower (higher) than the par or basis grade or location specified in the futures contract.
Discount basis: Method of quoting securities where the price is expressed as an annualized discount from maturity value.
Discretionary account: An arrangement by which the holder of an account gives written power of attorney to someone else, often a broker, to buy and sell without price approval of the holder.
Dominant future: The future having the largest number of open contracts.
Elliot Wave: A theory named after Ralph Elliot, who contended that the stock market tends to move in discernible and predictable patterns reflecting the basis harmony of nature; in technical analysis, a charting method based on the belief that all prices act as waves rising and falling rhythmically.
Exercise: To elect to buy or sell, taking advantage of the right conferred by an option contract.
Exercise (or Strike) price: The price specified in the option contract at which the buyer of a call can purchase the commodity during the life of the option, and the price specified in the option contract at which the buyer of a put can sell the commodity during the life of the option.
Expiration date: The date on which an option contract automatically expires.
Fictitious trading: Wash trading, bucketing, cross trading, or other schemes which give the appearance of trading when no bona fide, competitive trade has occurred.
Financial instruments: Currency, securities and indices of their value.
Floor broker: A person eligible to execute a customer order on the trading floor in a futures contract market.
Forced liquidation: The situation in which a customer's account is liquidated by the brokerage firm holding the account or, in the case of leveraged accounts, by the leverage transaction merchant, usually after notification, because the account is undercapitalized.
Force Majeure: A clause in a supply contract which permits either party not to fulfill the contractual commitments due to events beyond their control. These events may range from strikes to export delays in producing countries.
Foreign exchange: Foreign currency.
Forward: In the future.
Forward contracting: A cash transaction common in many industries, including commodity merchandising, in which the buyer and seller agree upon delivery of a specified quality and quantity of goods at a specified future date.
Forward market: An informal trading of commodities to be delivered at a future date.
Frontrunning: Taking an options position based upon non-public information regarding an impending large transaction in the underlying commodity in order to obtain a profit when the options market adjusts to the price at which the transaction occurs.
Futures contract: An agreement to purchase or sell a commodity for delivery in the future.
Grades: Various qualities of a commodity. Hedge ratio: Ratio of the value of futures contracts purchased or sold to the value of the cash commodity being hedged, a computation necessary to minimize basis risk.
Hedging: Taking a position in a futures market opposite to a position held in the cash market to minimize the risk of financial loss from an adverse price change; a purchase or sale of futures as a temporary substitute for a cash transaction that will occur later.
Index arbitrage: The simultaneous purchase (sale of stock index futures and the sale (purchase) of some or all of the component stocks which make up the particular stock index to profit from sufficiently large intermarket spreads between the futures contact and the index itself.
Interest rate futures: Futures contracts traded on fixed income securities.
In-the-money: A term used to describe an option contract that has a positive value if exercised.
Intrinsic value: A measure of the value of an option or a warrant if immediately exercised. The amount by which the current futures price for a commodity is above the strike price of a call option or below the strike price of a put option for the commodity.
Inverted market: A futures market in which near-month contracts are selling at prices that are higher than those of more distant months. An invested market is characteristic of a near-term supply shortage.
Leverage contract: A contract, standardized as to terms and conditions, for the long-term (ten years or longer) purchase (long leverage contract) or sale (short leverage contract) by a leverage customer of a leverage commodity which provides for participation by the leverage transaction merchant as a principal in each leverage transaction; initial and maintenance margin payments by the leverage customer; periodic payment by the leverage customer or accrual by the leverage transaction merchant to the leverage customer of a variable carrying charge or fee on the initial value of the contract plus any margin deposits made by the delivery of a commodity in the amount and form which can be readily purchased and sold in normal commercial or retain channels; delivery of the leverage commodity after satisfaction of the balance due on the contract; and determination of the contract purchase and repurchase, or sale and resale, prices by the leverage transaction merchant.
Limit: The maximum price advance or decline from the previous day's settlement price permitted during one trading session as fixed by the rules of an exchange.
Limit order: An order in which the customer specifies a price limit or other condition, such as time of an order, as contrasted with a market order which implies that the order should be filled as soon as possible.
Liquidation: The closing out of a long position.
Liquid market: A market in which selling and buying can be accomplished with minimal price change.
Long: One who has bought a futures contract to establish a market position; a market position which obligates the holder to take delivery; one who owns an inventory of commodities.
Margin: The amount of money or collateral deposited by a customer with his broker, by a broker with a clearing member, or by a clearing member with the clearinghouse, for the purpose of insuring the broker or clearinghouse against loss on open futures contracts. The margin is not partial payment on a purchase.
Margin call: A request from a brokerage firm to a customer to bring margin deposits up to the original level; a request by the clearinghouse to a clearing member to bring clearing margins back to minimum levels required by the clearinghouse rules.
Market correction: A small reversal in prices following a significant trending period.
Market maker: A professional securities dealer who stands ready to buy when there is an excess of sell orders and to sell when there is an excess of buy orders.
Market order: an order to buy or sell a futures contract at whatever price is obtainable at the time it is entered in the reign or pit.
Mark-to-market: Daily cash flow system used by U.S. futures exchanges to maintain minimum level of margin equity for a given futures or option contract position by calculating the gain or loss in each contract position resulting from changes in the price of the futures or option contracts at the end of each trading day.
Maturity: Period within which a futures contract can be settled by delivery of the actual commodity.
Momentum: In technical analysis, the relative change in price over a specific time interval.
Naked option: the sale of a call or put option without holding an offsetting position in the underlying commodity.
Net position: The difference between the open long contracts and the open short contracts held by a trader in any one commodity.
Offer: An indication of willingness to sell at a given price; opposite of bid.
Open interest: The total number of futures contracts long or short in a delivery month or market that has been entered into and not year liquidated by an offsetting transaction of fulfilled by delivery.
Option: A commodity option is a unilateral contract which gives the buyer the right to buy or sell a specified quantity of a commodity at a specific price within a specified period of time, regardless of the market price of that commodity; a term sometimes erroneously applied to a futures contract.
Out-of-the-money: A term used to describe an option that has no intrinsic value.
Paper profit or loss: The profit or loss that would be realized if the open contracts were liquidated as of a certain time or at a certain price.
Pegged price: The price at which a commodity has been fixed by agreement.
Pit: A specially constructed arena on the trading floor of some exchanges where trading in a futures contract is conducted.
Pork bellies: One of the major cuts of the hog carcass that, when cured, becomes bacon.
Portfolio insurance: A trading strategy which attempts to alter the nature of price changes in a portfolio to substantially reduce the likelihood of returns below some predetermined level for an established period of time. This can be achieved by moving assets against stocks, cash and fixed-income securities or, with the advent of stock index futures contracts, by hedging a stock-only portfolio by selling stock index futures in a declining market or purchasing futures in a rising market. The objective is to create an exposure similar to that of a stock portfolio with a protective purchased put option.
Position: An interest in the market in the form of one or more open contracts.
Price discovery: the process of determining the price level for a commodity based on supply and demand factors.
Price manipulation: Any planned operation, transaction or practice calculated to cause or maintain an artificial price.
Program trading: The purchase (or sale) of a large number of stocks contained in or comprising a portfolio.
Put option: An option to sell a specified amount of a commodity at an agreed price and time at any time until the expiation of the option. A put option is purchased to protect against a fall in price.
Pyramiding: The use of profits on existing positions as margin to increase the size of the position, normally in successively smaller increments.
Random walk: An economic theory that price movements in the commodity futures markets and in the securities markets are completely random in character (i.e., past prices are not a reliable indicator of future prices).
Ratio hedge: The number of options compared to the number of futures contracts taken in a position necessary to be a hedge; that is, risk neutral.
Resistance: A price area where new selling will emerge to dampen a continued rise.
Retracement: A reversal within a major price trend.
Reversal: A change of direction in prices.
Risk/reward ratio: The relationship between the profitability of loss and that of profit. This ratio is often used as a basis for trade selection or comparison.
Roll-over: A trading procedure involving the shift of one month of a straddle into another future month while holding the other contract month.
Scalper: A speculator on the trading floor of an exchange who buys and sells rapidly, with small profits or losses, holding his positions for only a short time during a trading session.
Settlement: The act of fulfilling the delivery requirements of a futures contract.
Sharpe Ratio: A measurement of trading performance calculated as the average return divided by the variance of those returns; named after W.P. Sharpe.
Short: The selling side of an open futures contract; a trader whose net position in the futures market shows an excess of open sales over open purchases.
Short selling: Selling a contract with the idea of delivering or of buying to offset it at a later date.
Soft: A description of a price which is gradually weakening.
Speculator: An individual who does not hedge, but who trades in commodity futures with the objective of achieving profits through the successful anticipation of price movements.
Spot: Market of immediate delivery of the product and immediate payment.
Spot price: The price at which a physical commodity for immediate delivery is selling at a given time and place.
Spread (or straddle): The purchase of one futures delivery month against the sale of another futures delivery month of the same commodity; the purchase of one delivery month of one commodity against the sale of that same delivery month of a different commodity; or the purchase of one commodity in one market against the sale of the commodity in another market, to take advantage of and profit from a change in price relationships. The term spread is also used to refer to the difference between the price of one futures month and the price of another month of the same commodity. A spread can also apply to options.
Squeeze: A market situation in which the lack of supplies tends to force shorts to cover their positions by offset at higher prices.
Stop limit order: An order that goes into force as soon as there is a trade at the specified price. The order can only be filled at the stop limit price or better.
Stop order: An order that becomes a market order when a particular price level is reached. A sell stop is placed below the market; a stop is placed above the market. Sometimes referred to as Stop Loss Order.
Striking price (exercise or contract price): The price, specified in the option contract, at which the underlying futures contract or commodity will move from seller to buyer.
Swap: The exchange of one asset or liability for a similar asset or liability for the purpose of lengthening or shortening maturities, or raising or lowering coupon rates, to maximize revenue or minimize financing costs
Switch: Offsetting a position in one delivery month of a commodity and simultaneous initiation of a similar position in another delivery month of the same commodity, a tactic referred to as "rolling forward".
Systematic risk: Market risk due to price fluctuations which cannot be eliminated by diversification.
Tender: To give notice to the clearing house of the intention to initiate delivery of the physical commodity in satisfaction of the futures contract.
Tick: Refers to a minimum change in price up or down.
Time of day order:: This is an order which is to be executed at a given minute in the session.
Trader: A merchant involved in cash commodities; a professional speculator who trades for his own account.
Trendline: In charting, a line drawn across the bottom or top of a price chart indicating the direction or trend of price movement. If up, the trendline is called bullish; if down, it is called bearish.
Volume of trade: The number of contracts traded during a specified period of time.
Wash sale: A fictitious transaction usually made so it will appear that there are or have been trades, but without actually taking a position in the market. Such sales are prohibited by the Commodity Exchange Act.
Writer: The issuer, grantor, or maker of an option contract.
Yield curve: A graphic representation of the market yield for a fixed income security plotted against the maturity of the security.
Back to Information