Accrued Interest: Interest earned between the most recent interest
payment and the present date but not yet paid to the lender.
Actuals: See Cash Commodity.
Add-on Method: A method of paying interest where the interest is added
onto the principal at maturity or interest payment dates.
Adjusted Futures Price: The cash-price equivalent reflected in the
current futures price. This is calculated by taking the futures price
times the conversion factor for the particular financial instrument
(e.g., bond or note) being delivered.
Against Actuals: See Exchange For Physicals.
Arbitrage: The simultaneous purchase and sale of similar commodities in
different markets to take advantage of a price discrepancy.
Arbitration: The procedure of settling disputes between members, or between members and customers.
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.
Associate Membership (CBOT): A Chicago Board of Trade membership that
allows an individual to trade financial instrument futures and other
At-the-Money Option: An option with a strike price that is equal, or
approximately equal, to the current market price of the underlying
Balance of Payment: A summary of the international transactions of a
country over a period of time including commodity and service
transactions, capital transactions, and gold movements.
Bar Chart: A chart that graphs the high, low, and settlement prices for
a specific trading session over a given period of time.
Basis: The difference between the current cash price and the futures
price of the same commodity. Unless otherwise specified, the price of
the nearby futures contract month is generally used to calculate the
Bear: Someone who thinks market prices will decline.
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.
Bid: An expression indicating a desire to buy a commodity at a given price; opposite of offer.
Board of Trade Clearing Corporation: An independent corporation that
settles all trades made at the Chicago Board of Trade acting as a
guarantor for all trades cleared by it, reconciles all clearing member
firm accounts each day to ensure that all gains have been credited and
all losses have been collected, and sets and adjusts clearing member
firm margins for changing market conditions. Also referred to as
clearing corporation. See Clearinghouse.
Book Entry Securities: Electronically recorded securities that include
each creditor's name, address, Social Security or tax identification
number, and dollar amount loaned, (i.e., no certificates are issued to
bond holders, instead, the transfer agent electronically credits
interest payments to each creditor's bank account on a designated
Broker: A company or individual that executes futures and options
orders on behalf of financial and commercial institutions and/or the
Brokerage Fee: See Commission Fee.
Brokerage House: See Futures Commission Merchant.
Bull: Someone who thinks market prices will rise.
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.
Butterfly Spread: The placing of two interdelivery spreads in opposite
directions with the center delivery month common to both spreads.
Buying Hedge: See Purchasing Hedge.
Calendar Spread: See Interdelivery Spread and Horizontal Spread.
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. See Spot and Forward Contract.
Cash Settlement: Transactions generally involving index-based futures
contracts that are settled in cash based on the actual value of the
index on the last trading day, in contrast to those that specify the
delivery of a commodity or financial instrument.
Certificate of Deposit (CD): A time deposit with a specific maturity evidenced by a certificate.
Charting: The use of charts to analyze market behavior and anticipate
future price movements. Those who use charting as a trading method plot
such factors as high, low, and settlement prices; average price
movements; volume; and open interest. Two basic price charts are bar
charts and point-and-figure charts. See Technical Analysis.
Cheap: Colloquialism implying that a commodity is under priced.
Cheapest to Deliver: A method to determine which particular cash debt
instrument is most profitable to deliver against a futures contract.
Clear: The process by which a clearinghouse maintains records of all
trades and settles margin flow on a daily mark-to-market basis for its
Clearing Corporation: See Board of Trade Clearing Corporation.
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.
Clearing Margin: Financial safeguards to ensure that clearing members
(usually companies or corporations) perform on their customers' open
futures and options contracts. Clearing margins are distinct from
customer margins that individual buyers and sellers of futures and
options contracts are required to deposit with brokers. See Customer
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.
Closing Price: See Settlement Price.
Closing Range: A range of prices at which buy and sell transactions
took place during the market close.
COM Membership (CBOT): A Chicago Board of Trade membership that allows
an individual to trade contracts listed in the commodity options market
Commission Fee: A fee charged by a broker for executing a transaction.
Also referred to as brokerage fee.
Commission House: See Futures Commission Merchant (FCM).
Commodity: An article of commerce or a product that can be used for
commerce. In a narrow sense, products traded on an authorized commodity
exchange. The types of commodities include agricultural products,
metals, petroleum, foreign currencies, and financial instruments and
indexes, to name a few.
Commodity 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.
Commodity Pool: An enterprise in which funds contributed by a number of
persons are combined for the purpose of trading futures contracts or
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.
Computerized Trading Reconstruction (CTR) System: A Chicago Board of
Trade computerized surveillance program that pinpoints in any trade the
traders, the contract, the quantity, the price, and time of execution
to the nearest minute.
Concurrent Indicators: See Lagging Indicators.
Consumer Price Index (CPI): A major inflation measure computed by the
U.S. Department of Commerce. It measures the change in prices of a
fixed market basket of some 385 goods and services in the previous
Contract Grades: See Deliverable Grades.
Contract Month: See Delivery Month.
Controlled Account: See Discretionary Account.
Convergence: A term referring to cash and futures prices tending to
come together (i.e., the basis approaches zero) as the futures contract
Conversion Factor: A factor used to equate the price of T-bond and
T-note futures contracts with the various cash T-bonds and T-notes
eligible for delivery. This factor is based on the relationship of the
cash-instrument coupon to the required 8 percent deliverable grade of a
futures contract as well as taking into account the cash instrument's
maturity or call.
Cost of Carry (or Carry): See Carrying Charge.
Coupon: The interest rate on a debt instrument expressed in terms of a
percent on an annualized basis that the issuer guarantees to pay the
holder until maturity.
Crop (Marketing) Year: The time span from harvest to harvest for
agricultural commodities. The crop marketing year varies slightly with
each ag commodity, but it tends to begin at harvest and end before the
next year's harvest, e.g., the marketing year for soybeans begins
September 1 and ends August 31. The futures contract month of November
represents the first major new-crop marketing month, and the contract
month of July represents the last major old-crop marketing month for
Crop Reports: Reports compiled by the U.S. Department of Agriculture on
various ag commodities that are released throughout the year.
Information in the reports includes estimates on planted acreage,
yield, and expected production, as well as comparison of production
from previous years.
Cross-Hedging: Hedging a cash commodity using a different but related
futures contract when there is no futures contract for the cash
commodity being hedged and the cash and futures markets follow similar
price trends (e.g., using soybean meal futures to hedge fish meal).
Crush Spread: The purchase of soybean futures and the simultaneous sale
of soybean oil and meal futures. See Reverse Crush.
Current Yield: The ratio of the coupon to the current market price of the debt instrument
Customer Margin: Within the futures industry, financial guarantees
required of both buyers and sellers of futures contracts and sellers of
options contracts to ensure fulfillment of contract obligations. FCMs
are responsible for overseeing customer margin accounts. Margins are
determined on the basis of market risk and contract value. Also
referred to as performance-bond margin. See Clearing Margin.
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.
Deferred (Delivery) Month: The more distant month(s) in which futures
trading is taking place, as distinguished from the nearby (delivery)
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: 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.
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.
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.
Discount Method: A method of paying interest by issuing a security at
less than par and repaying par value at maturity. The difference
between the higher par value and the lower purchase price is the
Discount Rate: The interest rate charged on loans by the Federal
Reserve to member banks. Discretionary Account: An arrangement by which
the holder of the account gives written power of attorney to another
person, often his broker, to make trading decisions. Also known as a
controlled or managed account.
Discretionary Account: An arrangement by which the holder of the
account gives written power of attorney to person, often his broker, to
make trading decisions. Also known as a controlled or managed account.
Econometrics: The application of statistical and mathematical methods
in the field of economics to test and quantify economic theories and
the solutions to economic problems.
Equilibrium Price: The market price at which the quantity supplied of a
commodity equals the quantity demanded.
Eurodollars: U.S. dollars on deposit with a bank outside of the United
States and, consequently, outside the jurisdiction of the United
States. The bank could be either a foreign bank or a subsidiary of a
European Terms: A method of quoting exchange rates, which measures the
amount of foreign currency needed to buy one U.S. dollar, i.e., foreign
currency unit per dollar. See Reciprocal of European Terms.
Exchange For Physicals (EFP): A transaction generally used by two
hedgers who want to exchange futures for cash positions. Also referred
to as against actuals or versus cash.
Exercise: The action taken by the holder of a call option if he wishes
to purchase the underlying futures contract or by the holder of a put
option if he wishes to sell the underlying futures contract.
Exercise Price: See Strike Price.
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.
Extrinsic Value: See Time Value.
Face Value: The amount of money printed on the face of the certificate
of a security; the original dollar amount of indebtedness incurred.
Federal Funds: Member bank deposits at the Federal Reserve; these funds
are loaned by member banks to other member banks.
Federal Funds Rate: The rate of interest charged for the use of federal funds.
Federal Housing Administration (FHA): A division of the U.S. Department
of Housing and Urban Development that insures residential mortgage
loans and sets construction standards.
Federal Reserve System: A central banking system in the United States,
created by the Federal Reserve Act in 1913, designed to assist the
nation in attaining its economic and financial goals. The structure of
the Federal Reserve System includes a Board of Governors, the Federal
Open Market Committee, and 12 Federal Reserve Banks.
Feed Ratio: A ratio used to express the relationship of feeding costs
to the dollar value of livestock. See Hog/Corn Ratio and Steer/Corn
Fill-or-Kill: A customer order that is a price limit order that must be
filled immediately or canceled.
Financial Analysis Auditing Compliance Tracking System (FACTS): The
National Futures Association's computerized system of maintaining
financial records of its member firms and monitoring their financial
Financial Instrument: There are two basic types: (1) a debt instrument,
which is a loan with an agreement to pay back funds with interest; (2)
an equity security, which is a share or stock in a company.
First Notice Day: 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.
Foreign Exchange Market: See Forex Market.
Forex Market: An over-the-counter market where buyers and sellers
conduct foreign exchange business by telephone and other means of
communication. Also referred to as foreign exchange market.
Forward (Cash) Contract: A cash contract in which a seller agrees to
deliver a specific cash commodity to a buyer sometime in the future.
Forward contracts, in contrast to futures contracts, are privately
negotiated and are not standardized.
Full Carrying Charge Market: A futures market where the price
difference between delivery months reflects the total costs of
interest, insurance, and storage.
Full Membership (CBOT): A Chicago Board of Trade membership that allows
an individual to trade all futures and options contracts listed by the
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.
Gamma: A measurement of how fast delta changes, given a unit change in the underlying futures price.
GIM Membership (CBOT): A Chicago Board of Trade membership that allows
an individual to trade all futures contracts listed in the government
instrument market category.
GLOBEX®: A global after-hours electronic trading system.
Grain Terminal: Large grain elevator facility with the capacity to ship
grain by rail and/or barge to domestic or foreign markets.
Gross Domestic Product (GDP): The value of all final goods and services
produced by an economy over a particular time period, normally a year.
Gross National Product (GNP): Gross Domestic Product plus the income
accruing to domestic residents as a result of investments abroad less
income earned in domestic markets accruing to foreigners abroad.
Gross Processing Margin (GPM): The difference between the cost of
soybeans and the combined sales income of the processed soybean oil and
Hedger: An individual or company owning or planning to own a cash
commodity corn, soybeans, wheat, U.S. Treasury bonds, notes, bills,
etc. and concerned that the cost of the commodity may change before
either buying or selling it in the cash market. A hedger achieves
protection against changing cash prices by purchasing (selling) futures
contracts of the same or similar commodity and later offsetting that
position by selling (purchasing) futures contracts of the same quantity
and type as the initial transaction.
Hedging: The practice of offsetting the price risk inherent in any cash
market position by taking an equal but opposite position in the futures
market. Hedgers use the futures markets to protect their businesses
from adverse price changes. See Selling (Short) Hedge and Purchasing
High: The highest price of the day 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. See Feed Ratio.
Holder: See 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.
IDEM Membership (CBOT): A Chicago Board of Trade membership of trading
privileges for futures contracts in the index, debt, and energy markets
category (gold, municipal bond index, 30-day fed funds, and stock index
Initial Margin: See 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.
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.
See Intrinsic Value.
Intramarket Spread: See Interdelivery Spread.
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
Inverted Market: A futures market in which the relationship between two
delivery months of the same commodity is abnormal.
Invisible Supply: Uncounted stocks of a commodity in the hands of
wholesalers, manufacturers, and producers that cannot be identified
accurately; stocks outside commercial channels but theoretically
available to the market.
Lagging Indicators: Market indicators showing the general direction of
the economy and confirming or denying the trend implied by the leading
indicators. Also referred to as concurrent indicators.
Last Trading Day: According to the Chicago Board of Trade rules, the
final day when trading may occur in a given futures or options contract
month. Futures contracts outstanding at the end of the last trading day
must be settled by delivery of the underlying commodity or securities
or by agreement for monetary settlement (in some cases by EFPs).
Leading Indicators: Market indicators that signal the state of the
economy for the coming months. Some of the leading indicators include:
average manufacturing workweek, initial claims for unemployment
insurance, orders for consumer goods and material, percentage of
companies reporting slower deliveries, change in manufacturers'
unfilled orders for durable goods, plant and equipment orders, new
building permits, index of consumer expectations, change in material
prices, prices of stocks, change in money supply.
Leverage: The ability to control large dollar amounts of a commodity
with a comparatively small amount of capital.
Limit Order: An order in which the customer sets a limit on the price and/or time of execution.
Limits: See Position Limit, Price Limit, Variable Limit.
Linkage: The ability to buy (sell) contracts on one exchange (such as
the Chicago Mercantile Exchange) and later sell (buy) them on another
exchange (such as the Singapore International Monetary Exchange).
Liquid: A characteristic of a security or commodity market with enough
units outstanding to allow large transactions without a substantial
change in price. Institutional investors are inclined to seek out
liquid investments so that their trading activity will not influence
the market price.
Liquidate: Selling (or purchasing) futures contracts of the same
delivery month purchased (or sold) during an earlier transaction or
making (or taking) delivery of the cash commodity represented by the
futures contract. See Offset.
Liquidity Data Bank®(LDB®): A computerized profile of CBOT market
activity, used by technical traders to analyze price trends and develop
trading strategies. There is a specialized display of daily volume data
and time distribution of prices for every commodity traded on the
Chicago Board of Trade.
Loan Program: A federal program in which the government lends money at
preannounced 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 stocks of
Loan Rate: The amount lent per unit of a commodity to farmers.
Long: One who has bought futures contracts or owns a cash commodity.
Long Hedge: See Purchasing Hedge.
Low: The lowest price of the day for a particular futures contract.
Maintenance Margin: A set minimum margin (per outstanding futures
contract) that a customer must maintain in his margin account.
Managed Account: See Discretionary Account.
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
Margin: See Clearing Margin and Customer Margin.
Margin Call: A call from a clearinghouse to a clearing member, or from
a brokerage firm to a customer, to bring margin deposits up to a
required minimum level.
Market Information Data Inquiry System (MIDIS): Historical Chicago
Board of Trade price, volume, open interest data and other market
information accessible by computers within the Chicago Board of Trade
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
Market Price Reporting and Information System (MPRIS): The Chicago
Board of Trade's computerized price-reporting system.
Market Profile®: A Chicago Board of Trade information service that
helps technical traders analyze price trends. Market Profile consists
of the Time and Sales ticker and the Liquidity Data Bank.
Market Reporter: A person employed by the exchange and located in or
near the trading pit who records prices as they occur during trading.
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
and sellers are protected against the possibility of contract default.
Minimum Price Fluctuation: See Tick.
Money Supply: The amount of money in the economy, consisting primarily
of currency in circulation plus deposits in banks: M-1–U.S. money
supply consisting of currency held by the public, traveler's checks,
checking account funds, NOW and super-NOW accounts, automatic transfer
service accounts, and balances in credit unions. M-2–U.S. money supply
consisting of M-1 plus savings and small time deposits (less than
$100,000) at depository institutions, overnight repurchase agreements
at commercial banks, and money market mutual fund accounts. M-3 –U.S.
money supply consisting of M-2 plus large time deposits ($100,000 or
more) at depository institutions, repurchase agreements with maturities
longer than one day at commercial banks, and institutional money market
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.
Municipal Bonds: Debt securities issued by state and local governments,
and special districts and counties.
National Futures Association (NFA): An industry wide,
industry-supported, self-regulatory organization for futures and
options markets. The primary responsibilities of the NFA are to enforce
ethical standards and customer protection rules, screen futures
professionals for membership, audit and monitor professionals for
financial and general compliance rules, and provide for arbitration of
Nearby (Delivery) Month: The futures contract month closest to
expiration. Also referred to as spot month.
Negative Yield Curve: See Yield Curve.
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.
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. See Liquidate.
OPEC: Organization of Petroleum Exporting Countries, emerged as the
major petroleum pricing power in1973, when the ownership of oil
production in the Middle East transferred from the operating companies
to the governments of the producing countries or to their national oil.
Members are: Algeria, Ecuador, Gabon, Indonesia, Iran, Iraq, Kuwait,
Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and
Opening Range: A range of prices at which buy and sell transactions
took place during the opening of the market.
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 Market Operation: The buying and selling of government securities
Treasury bills, notes, and bonds by the Federal Reserve.
Open Outcry: Method of public auction for making verbal bids and offers
in the trading pits or rings of futures exchanges.
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.
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 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: See Option Seller.
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 (OTC) Market: A market where products such as stocks,
foreign currencies, and other cash items are bought and sold by
telephone and other means of communication.
P&S (Purchase and Sale) Statement: A statement sent by a commission
house to a customer 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.
Par: The face value of a security. For example, a bond selling at par
is worth the same dollar amount it was issued for or at which it will
be redeemed at maturity.
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. See Customer Margin and Clearing Margin.
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: A market commitment. A buyer of a futures contract is said to
have a long position and, conversely, a seller of futures contracts is
said to have a short position.
Position Day: 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.
Positive Yield Curve: See Yield Curve.
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. See Option Premium.
Price Discovery: The generation of information about ""future'' cash
market prices through the futures markets.
Price Limit: The maximum advance or decline from the previous day's
settlement price permitted for a contract in one trading session by the
rules of the exchange. See also Variable Limit.
Price Limit Order: A customer order that specifies the price at which a trade can be executed.
Primary Dealer: A designation given by the Federal Reserve System to
commercial banks or broker/dealers who meet specific criteria. Among
the criteria are capital requirements and meaningful participation in
the Treasury auctions.
Primary Market: Market of new issues of securities.
Prime Rate: Interest rate charged by major banks to their most creditworthy customers.
Producer Price Index (PPI): An index that shows the cost of resources
needed to produce manufactured goods during the previous month.
Pulpit: A raised structure adjacent to, or in the center of, the pit or
ring at a futures exchange where market reporters, employed by the
exchange, record price changes as they occur in the trading pit.
Purchasing Hedge (or Long Hedge): Buying futures contracts to protect
against a possible price increase of cash commodities that will be
purchased in the future. At the time the cash commodities are bought,
the open futures position is closed by selling an equal number and type
of futures contracts as those that were initially purchased. Also
referred to as a buying hedge. See Hedging.
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.
Range (Price): The price span during a given trading session, week, month, year, etc.
Reciprocal of European Terms: One method of quoting exchange rates,
which measures the U.S. dollar value of one foreign currency unit,
i.e., U.S. dollars per foreign units. See European Terms.
Repurchase Agreements ( or Repo): An agreement between a seller and a
buyer, usually in U.S. government securities, in which the seller
agrees to buy back the security at a later date.
Reserve Requirements: The minimum amount of cash and liquid assets as a
percentage of demand deposits and time deposits that member banks of
the Federal Reserve are required to maintain.
Resistance: A level above which prices have had difficulty penetrating.
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. See Crush Spread.
Runners: Messengers who rush orders received by phone clerks to brokers for execution in the pit.
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.
Security: Common or preferred stock; a bond of a corporation, government, or quasi-government body.
Selling Hedge (or Short Hedge): Selling futures contracts to protect
against possible declining prices of commodities that will be sold in
the future. At the time the cash commodities are sold, the open futures
position is closed by purchasing an equal number and type of futures
contracts as those that were initially sold. See Hedging.
Settle: See Settlement 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: See Selling Hedge.
Simulation Analysis of Financial Exposure (SAFE): A sophisticated
computer risk-analysis program that monitors the risk of clearing
members and large-volume traders at the Chicago Board of Trade. It
calculates the risk of change in market prices or volatility to a firm
carrying open positions.
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: Usually refers to a cash market price for a physical commodity
that is available for immediate delivery.
Spot Month: See Nearby (Delivery) Month.
Spread: The price difference between two related markets or commodities.
Spreading: The simultaneous buying and selling of two related markets
in the expectation that a profit will be made when the position is
offset. Examples include: buying one futures contract and selling
another futures contract of the same commodity but different delivery
month; buying and selling the same delivery month of the same commodity
on different futures exchanges; buying a given delivery month of one
futures market and selling the same delivery month of a different, but
related, futures market.
Steer/Corn Ratio: The relationship of cattle prices to feeding costs.
It is measured by dividing the price of cattle ($/hundredweight) by the
price of corn ($/bushel). When corn prices are high relative to cattle
prices, fewer units of corn equal the dollar value of 100 pounds of
cattle. Conversely, when corn prices are low in relation to cattle
prices, more units of corn are required to equal the value of 100
pounds of beef. See Feed Ratio.
Stock Index: An indicator used to measure and report value changes in a
selected group of stocks. How a particular stock index tracks the
market depends on its composition the sampling of stocks, the weighting
of individual stocks, and the method of averaging used to establish an
Stock Market: A market in which shares of stock are bought and sold.
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.
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.
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.
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.
Technical Analysis: Anticipating future price movement using historical
prices, trading volume, open interest, and other trading data to study
Tick: The smallest allowable increment of price movement for a
contract. Also referred to as minimum price fluctuation.
Time Limit Order: A customer order that designates the time during which it can be executed.
Time and Sales Ticker: Part of the Chicago Board of Trade Market
Profile system consisting of an on-line graphic service that transmits
price and time information throughout the day.
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.
Time Value: 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.
Trade Balance: The difference between a nation's imports and exports of merchandise.
Trading Limit: See Position Limit.
Treasury Bill: See U.S. Treasury Bill.
Treasury Bond: See U.S. Treasury Bond.
Treasury Note: See U.S. Treasury Note.
Underlying Futures Contract: The specific futures contract that is
bought or sold by exercising an option.
U.S. Treasury Bill: A short-term U.S. government debt instrument with
an original maturity of one year or less. Bills are sold at a discount
from par with the interest earned being the difference between the face
value received at maturity and the price paid.
U.S. Treasury Bond: Government-debt security with a coupon and original
maturity of more than 10 years. Interest is paid semiannually.
U.S. Treasury Note: Government-debt security with a coupon and original maturity of one to 10 years.
Variable Limit: 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 clearinghouse.
Versus Cash: See Exchange For Physicals.
Vertical Spread: Buying and selling puts or calls of the same
expiration month but different strike prices.
Volatility: A measurement of the change in price over a given time
period. It is often expressed as a percentage and computed as the
annualized standard deviation of percentage change in daily price.
Volume: The number of purchases or sales of a commodity futures
contract made during a specified period of time, often the total
transactions for one trading day.
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
Wire House: See Futures Commission Merchant (FCM).
Writer: See Option Seller.
Yield: A measure of the annual return on an investment.
Yield Curve: A chart in which the yield level is plotted on the
vertical axis and the term to maturity of debt instruments of similar
creditor thinness is plotted on the horizontal axis. The yield curve is
positive when long-term rates are higher than short-term rates.
However, when short-term rates are higher than yields on long-term
investments, the 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.
Please note: This information is a treasure trove of highly informative
information designed to teach beginners about and how to trade the
futures markets. However, before you begin trading on your own, we
strongly advise you to first trade with the assistance of an
experienced professional commodity broker. A broker can provide you
with many valuable functions to suit your choice. You may only want to
have a broker try to make sure you don’t make costly errors by
incorrectly initiating and exiting a trade (a common error among
beginning traders). On the other hand, you may want the broker to take
a more active role: acting as a sounding board for your trades,
providing his trading recommendations, research reports, charts, and
other helpful trading tools. Or, you may want the broker to find you a
commodity trading advisor that best meets your investment goals,
affordability, and suitability to professionally manage your account.