| A
Against
Actuals: A transaction
generally used by two hedgers who want to exchange futures for cash positions. Also
referred to as "against actuals" or "versus cash".
Arbitrage:
The simultaneous purchase and sale of
similar commodities in different markets to take advantage of price discrepancy.
Assign:
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.
Average Farm
Price Estimate: Marketing-year
weighted average price received by farmers.
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B
Balance of
Payment: A summary of the
international transactions of a country over a period of time including commodity and
service 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 Market:
A period of declining market prices.
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.
Bear: Someone who thinks market prices will
decline.
Beginning
Stocks: Grain and oilseed
commodities not consumed during the previous marketing year. These are the stocks
"carried over" into the current marketing year and added to the stocks produced
during that crop year. See Carry-Over
Bid:
An expression indicating a desire to
buy a commodity at a given price, opposite of offer.
Broker:
A company or individual that executes
futures and options orders on behalf of financial and commercial institutions and/or the
general public.
Brokerage Fee: A fee charged by a broker for executing a
transaction.
Brokerage
House: 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. Also
referred to as "commission house" or "wire house'.
Bull Market:
A period of rising market prices.
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.
Bull:
Someone who thinks market prices will
rise.
Buying Hedge: Buyer futures contracts to protect against
a possible price increase of cash commodities that will e 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.
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C
Calendar
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. 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.
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
deletes a customer's previous order.
Carrying
Charge: 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 of funds
necessary to buy the instrument. Also referred to as cost of carry or carry.
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 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. Spot usually refers to a cash market
price for a physical commodity that is available for immediate delivery. A forward
contract is 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.
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, in contrast to those that specify the
delivery of a commodity or financial instrument.
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.
Anticipating future price movement using historical prices, trading volume, open interest
and other trading data to study price patterns.
Cheap:
Colloquialism implying that a
commodity is under priced.
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
Member: 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.
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.
Closing 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 price
Closing Range:
A range of prices at which buy and
sell transactions took place during the market close.
Commission Fee:
A fee charged by a broker for
executing a transaction. Also referred to as brokerage fee.
Commission
House: 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. Also
referred to as "wire house'.
Commodity
Credit Corp.: 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.
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 index, to name a few.
Contract
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.
Contract Month:
A specific month in which
delivery may take place under the terms of a futures contract.
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.
Cost of Carry
(or 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 of funds
necessary to buy the instrument.
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).
Crushing:
The act of processing soybeans into
soybean meal and oil.
Crush Spread:
The purchase of soybean futures and
the simultaneous sale of soybean oil and meal futures. The sale of soybean futures and the
simultaneous purchase of soybean oil and meal futures.
Customer
Margin: Within the futures
industry, financial guarantees required of both buyers and sellers of futures contracts
and sellers of options contracts to ensure fulfilling of contract obligations. FCMs are
responsible for overseeing customer margin accounts. Margins are determined on the basis
of market risk and contract value. Also referred to as performance-bond 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.
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D
Daily Trading
Limit: The maximum price
range set by the exchange cash 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.
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. Also referred to as contract
grades.
Delivery Day:
The third day in the delivery process
at the Chicago Board of Trade, 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.
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.
Delivery:
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.
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.
Demand, Law of:
The relationship between product
demand and price.
Differentials: Price differences between classes, grades,
and delivery locations of various stocks of the same commodity.
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E
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.
Ending Stocks:
Grain and oilseed commodities not
consumed during the current marketing year. These are the stocks "carried over"
into the following marketing year and added to the stocks produced during that crop year. See Carry-Over
Equilibrium
Price: The market price at
which the quantity supplied of a commodity equals the quantity demanded.
Exchange for
Physicals: 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 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.
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.
Expanded
Trading Hours: Additional
trading hours of specific futures and options contracts at the Chicago Board of Trade that
overlap with business hours in other time zones.
Expiration
Date: 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.
Exports:
The amount of grain or oilseed sold
to foreign buyers.
Extrinsic
Value: The amount of money
option buyer 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 time value.
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F
Feed Ratio:
A ratio used to express the
relationship of feeding costs to the dollar value of livestock. Hog/Corn Ratio 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 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. 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.
Fill-or Kill: A customer order that is a price limit
order that must be filled immediately or canceled.
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.
Floor Broker
(FB): 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.
Floor Trader
(FT): 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.
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
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. Also referred to as "commission house" or "wire
house'.
Futures
Contract: A legally
binding agreement, made on the trading floor of 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 for each
commodity. The only variable is price, which is discovered on an exchange trading floor.
Futures
Exchange: A central
marketplace with established rules and regulations where buyers and sellers meet to trade
futures and options on futures contracts.
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G
Gamma: A measurement of how fast delta changes,
given a unit change in the underlying futures price.
Grain Terminal:
Large grain elevator facility with
the capacity to ship grain by rail and/or barge to domestic or foreign markets.
Gross
Processing Margin: The
difference between the cost of soybeans and the combined sales income of the processed
soybean oil and meal.
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H
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 business from adverse
price changes. Selling (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. and Purchasing
(Long) Hedge - Buyer futures contracts to protect against a possible price increase of
cash commodities that will e 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. Also referred to as a buying hedge.
High:
The highest price of the day, week,
or month for a particular futures contract.
Hog/Corn Ratio:
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 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. A ratio used to express the relationship of feeding costs to the
dollar value of livestock.
Holder:
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 Option Buyer.
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.
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I
In-the-Money
Option: 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. The amount by which an
option is in-the-money.
Initial Margin:
The amount a futures market
participant must deposit into his margin account at the time he places an order to buy or
sell a futures contract. Also referred to as original margin.
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.
Intrinsic
Value: The amount by which
an option is in-the-money. 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.
Introducing
Broker: 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 e
identified accurately; stocks outside commercial channels but theoretically available to
the market.
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J
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K
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L
Last Trading
Day: According to the
Chicago Board of Trade rules, the final day when trading may occur in a given futures or
option 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).
LDP:
Loan
Deficiency Payments. The Federal
Agriculture Improvement and Reform Act of 1996 (the 1996 FAIR Act) initiated a
non-recourse marketing assistance loans and loan deficiency payments (LDP) program for 16
crops, including corn and soybeans. The purpose of this program is to provide producers a
financial tool to help farmers market their crops throughout the year. The non-recourse
loans allow farmers to store production and sell it when market conditions are favorable.
The crop is employed as collateral for the loan. The loans are non-recourse in that the
farmer has the option of repaying the loan by delivering the crop to the Commodity Credit
Corporation at loan maturity.
Leverage:
The ability to control large dollar
amounts of a commodity with a comparatively small amount of capital.
Limit Order:
An order in which the customer sets a
limit on the price and/or time of execution.
Limits:
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.
The maximum advance or decline–from the previous day's settlement–permitted for
a contract in one trading session by the rules of the exchange. According to the Chicago
Board of Trade rules, an expanded allowable price range set during volatile markets.
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.
Taking a second futures or options position opposite to the initial or opening position.
Loan Program:
A federal program in which the
government lends money at preannounce rates to farmers and allows them to use the crops
they plant for the upcoming crop year as collateral. Default on these loans is the primary
method by which the government acquires stock of agricultural commodities.
Loan Rate: The amount lent per unit of a commodity to
farmers.
Long Hedge:
Buyer futures contracts to protect
against a possible price increase of cash commodities that will e 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. Also referred to as a buying hedge.
Long:
One who has bought futures contracts
or owns a cash commodity.
Low:
The lowest price of the day, week, or
month for a particular futures contract.
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M
Maintenance:
A set minimum margin (per outstanding
futures contract) that a customer must maintain in his margin account.
Managed
Account: 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. Within the futures industry, financial guarantees
required of both buyers and sellers of futures contracts and sellers of options contracts
to ensure fulfilling of contract obligations. FCMs are responsible for overseeing customer
margin accounts. Margins are determined on the basis of market risk and contract value.
Also referred to as performance-bond margin.
Managed
Futures: Represents an
industry comprised of professional money mangers 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.
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. Within the futures industry, financial guarantees required of both buyers
and sellers of futures contracts and sellers of options contracts to ensure fulfilling of
contract obligations. FCMs are responsible for overseeing customer margin accounts.
Margins are determined on the basis of market risk and contract value. Also referred to as
performance-bond margin.
Market Order:
An order to buy or sell a futures
contract of a given delivery month to be filled at the best possible price and as soon as
possible.
Marking-to-Market:
To debit or credit on a
daily basis a margin account based on the close of that day's trading session. In this
way, buyers an sellers are protected against the possibility of contract default.
Minimum Price
Fluctuation: The smallest
allowable increment of price movement for a contract.
Moving-Average
Charts: 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.
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N
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 riles, screen futures
professional for membership, audit and monitor professionals for financial and general
compliance rules and provide for arbitration of futures-related disputes.
Nearby
(Delivery) Month: The
futures contract month closest to expiration. Also referred to as spot month.
Notice Day:
According to Chicago Board of Trade
rules, 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.
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O
OPEC:
Organization of Petroleum Exporting
Countries, 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 companies. Members are: Algeria,
Ecuador, Gabon, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the
United Arab Emirates, and Venezuela.
Offer:
An expression indicating one's desire
to sell a commodity at a given price; opposite of bid.
Offset:
Taking a second futures or options
position opposite to the initial or opening position. 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.
Open Interest:
The total number of futures or
options contracts of a given commodity that have not yet been offset by an opposite
futures or option transaction nor fulfilled by delivery of the commodity or option
exercise. Each open transaction has a buyer and a seller, but for calculation of open
interest, only one side of the contract is counted.
Open Outcry:
Method of public auction for making
verbal bids and offers in the trading pits or rings of futures exchanges.
Opening Range:
A range of prices at which buy an
sell transactions took place during the opening of the market.
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.
Option Writer:
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 Option Seller.
Option: 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.
Original
Margin: The amount a
futures market participant must deposit into his margin account at the time he places 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.
Over-the-Counter
Market: A market where
products such as stocks, foreign currencies, and other cash items are bought and sold by
telephone and other means of communications.
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P
Payment-In-Kind
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 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.
Within the futures industry, financial guarantees required of both buyers and sellers of
futures contracts and sellers of options contracts to ensure fulfilling of contract
obligations. FCMs are responsible for overseeing customer margin accounts. Margins are
determined on the basis of market risk and contract value. 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.
Pit:
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.
Point-and-Figure
Charts: Charts that show
price changes of a minimum amount regardless of the time period involved.
Position Day: According to the Chicago Board of Trade
rules, 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 Board of
Trade Clearing Corporation 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.
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.
Premium:
(1) The additional payment allowed by
exchange regulation for delivery of higher-than-required standards or grades of a
commodity against a futures contract. (2) In speaking of price relationships between
different delivery months of a given commodity, one is said to be "trading at a
premium" over another when its price is greater than that of the other. (3) In
financial instruments, the dollar amount by which a security trades above its principal
value. 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.
Price
Discovery: The generation
of information about "future" cash market prices through the futures markets.
Price Limit
Order: A customer order
that specifies the price at which a trade can be executed.
Price Limit:
The maximum advance or
decline–from the previous day's settlement–permitted for a contract in one
trading session by the rules of the exchange. According to the Chicago Board of Trade
rules, an expanded allowable price range set during volatile markets.
Production:
The amount of grain or oil seed
produced during the crop year. Derived by
multiplying the harvested acres by the yield per acre.
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.
Purchase and
Sell Statement: A
Statement sent by a commission house to a customer when his futures or options on futures
position ha 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 transaction.
Purchasing
Hedge or Long Hedge: Buyer
futures contracts to protect against a possible price increase of cash commodities that
will e 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. Also referred to as a buying hedge. 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
business from adverse price changes.
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.
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Q
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R
Range (Price):
The price span during a given trading
session, week, month, year, etc.
Resistance:
A level above which prices have had
difficulty penetrating.
Resumption: The reopening the following day of specific
futures and options markets that also trade during the evening session at the Chicago
Board of Trade.
Reverse Crush
Spread: The sale of
soybean futures and the simultaneous purchase of soybean oil and meal futures. The
purchase of soybean futures and the simultaneous sale of soybean oil and meal futures.
Runners: Messengers who rush orders received by
phone clerks to brokers for execution in the pit.
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S
Scalper:
A trader who trades for small,
short-term profits during the course of a trading session, rarely carrying a position
overnight.
Secondary
Market: Market where
previously issued securities are bought and sold.
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. 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 business from adverse price changes.
Settle: 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 settlemeny price or closing
price.
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:
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.
Speculator:
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.
Spot Month: The futures contract month closest to
expiration. Also referred to as nearby delivery month.
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. A ratio used to express the
relationship of feeding costs to the dollar value of livestock.
Stop Order: 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.
Stop-Limit
Order: 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.
Strike 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 exercise price.
Supply, Law of:
The relationship between product
supply and its price.
Supply, Total:
The total amount of supply of a grain
or oilseed. Consists of Beginning Stocks +
Production + Imports.
Support:
The place on a chart where the buying
of futures contracts is sufficient to halt a price decline.
Suspension:
The end of the evening session for
specific futures and options markets traded at the Chicago Board of Trade.
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T
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.
Time Limit
Order: A customer order
that designates the time during which it can be executed.
Time Value: The amount of money option buyer 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.
Time-Stamped: 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) completed.
Trade Balance:
The difference between a nation's
imports and exports of merchandise.
Trading 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 position limit.
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U
Underlying
Futures Contract: The
specific futures contract that is bought or sold by exercising an option.
Use, Domestic:
The amount of grain or oilseed
consumed during a marketing year within the country of origin or production.
Use, Total:
The amount of grain or oilseed
consumed during a marketing year. Total Use
consists of all subcomponents of usage: feed, food, seed, sillage, crushing, exports,
domestic use, and residual.
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V
Variable Limit:
According to the Chicago Board of
Trade rules, 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.
Versus Cash: A transaction generally used by two hedgers
who want to exchange futures for cash positions. Also referred to as "against
actuals" or "exchange for physicals."
Verticle
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 period. It is often expressed as a percentage and computed as the annualized
standard deviation of the percentage change in daily price.
Volume:
The number of purchases or sales of a
commodity futures contract made during a specific period of time, often the total
transactions for one trading day.
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W
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.
Wire House:
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. Also referred to as
"commission house" or Futures Commission Merchant (FCM).
Writer: 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 option seller.
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X
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Y
Yield Curve:
A chart in which the yield level is
plot on the vertical axis and the term to maturity of debt instruments of similar
creditworthiness is plotted n the horizontal axis. The yield curve is positive when
long-term rates are higher than short-term rates However, yield curve is negative or
inverted.
Yield to
Maturity: The rate of
return an investor receives if a fixed-income security is held to maturity.
Yield:
A measure of the annual return on an
investment.
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Z
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