A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
A
Account
The bookkeeping
record of a customer's transaction and credit (or debit)
balances. This record usually includes confirmation of
transactions, listing of holdings and/or open positions,
cash and/or cash equivalents, beginning and ending
liquidating value.
Account balance
The
amount of money or debt in an account.
Accrued Interest
Interest earned between the most recent interest payment and
the present date but not yet paid to the lender.
Add-on Method
A method
of paying interest where the interest is added onto the
principal at maturity or interest payment dates.
Adjusted Futures Price
The cash-price equivalent reflected in the current futures
price. This is calculated by taking the futures price times
the conversion factor for the particular financial
instrument (e.g., bond or note) being delivered.
Arbitrage
The
simultaneous purchase and sale of 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)
A person associated with any futures commission merchant,
introducing broker, commodity trading advisor, commodity
pool operator, or leverage transaction merchant as a
partner, officer, employee, consultant, or agent. Also, any
person occupying a similar status or performing similar
functions, in any capacity that involves
(a) the
solicitation or acceptance of customers' orders,
discretionary accounts, or participation in a commodity pool
(other than in a clerical capacity); or (b) the supervision
of any person or persons so engaged.
At-the-Market
An order
to buy or sell a futures contract at whatever price is
obtainable when the order reaches the trading floor. Also
called a Market Order.
At-the-Money Option
An
option with a strike price that is equal, or approximately
equal, to the current market price of the underlying futures
contract.
B
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 spot or cash price of a commodity and the price
of the nearest futures contract for the same or a related
commodity. Basis is usually computed in relation to the
futures contract next to expire and may reflect different
time periods, product forms, qualities, or locations.
Basis Point
The
measurement of a change in the yield of a debt security. One
basis point equals 1/100 of one percent.
Bear
One who expects a
decline in prices. The opposite of a "bull." A news item is
considered bearish if it is expected to result in lower
prices.
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.
Beta (Beta Coefficient)
A measure of the variability of rate of return or value of a
stock or portfolio compared to that of the overall market.
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
See
Commission Fee.
Bull
One who expects a
rise in prices. The opposite of "bear." A news item is
considered bullish if it portends higher prices.
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 (or Long Hedge)
Hedging transaction in which futures contracts are
bought to protect against possible increases in the cost of
commodities.
C
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 oil
seed 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.
Cash Price
The price in
the marketplace for actual cash or spot commodities to be
delivered via customary market channels.
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.
CFTC
See Commodity
Futures Trading Commission.
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. Also see Technical Analysis.
Cheapest to Deliver
A
method to determine which particular cash debt instrument is
most profitable to deliver against a futures contract.
Clear
The process by
which a clearinghouse maintains records of all trades and
settles margin flow on a daily mark-to-market basis for its
clearing member.
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 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
The price
(or price range) recorded during trading that takes place in
the final moments of a day's activity that is officially
designated as the "close."
COM Membership (CBOT)
A
Chicago Board of Trade membership that allows an individual
to trade contracts listed in the commodity options market
category.
Commission Fee
A fee
charged by a broker for executing a transaction. Also
referred to as brokerage fee.
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)
The Federal regulatory agency
established by the CFTC Act of 1974 to administer the
Commodity Exchange Act.
Commodity Pool
An
enterprise in which funds contributed by a number of persons
are combined for the purpose of trading futures contracts or
commodity options.
Commodity Pool Operator (CPO)
Individuals or firms in businesses similar to
investment trusts or syndicates that solicit or accept
funds, securities or property for the purpose of trading
commodity futures contracts or commodity options.
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.
Congestion
(1) A market
situation in which shorts attempting to cover their
positions are unable to find an adequate supply of contracts
provided by longs willing to liquidate or by new sellers
willing to enter the market, except at sharply higher
prices; (2) in technical analysis, a period of time
characterized by repetitious and limited price fluctuations.
Consumer Price Index (CPI)
A major inflation measure computed by the U.S. Department of
Commerce. It measures the change in prices of a fixed market
basket of some 385 goods and services in the previous month.
Contract
1) A term of
reference describing a unit of trading for a commodity
future or option; (2) An agreement to buy or sell a
specified commodity, detailing the amount and grade of the
product and the date on which the contract will mature and
become deliverable.
Contract Month
Jan-F,
Feb-G, Mar-H, Apr-J, May-K, Jun-M, Jul-N, Aug-Q, Sep-U,
Oct-V, Nov-X, Dec-Z. Click here
for our easy to use Monthly Symbols Chart.
Controlled Account
Any
account for which trading is directed by someone other than
the owner. Also called a Managed Account or a 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 nears expiration.
Conversion Factor
A
factor used to equate the price of T-bond and T-note futures
contracts with the various cash T-bonds and T-notes eligible
for delivery. 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.
Coupon
A fixed dollar
amount of interest payable per annum, stated as a percentage
of principal value, usually payable in semiannual
installments.
CPO
See
Commodity
Pool Advisor
Crop (Marketing) Year
The time span from harvest to harvest for agricultural
commodities. The crop marketing year varies slightly with
each 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).
Cross-Margining
A
procedure for margining related securities, options, and
futures contracts jointly when different clearing houses
clear each side of the position.
Crush Spread
The
purchase of soybean futures and the simultaneous sale of
soybean oil and meal futures. See Reverse Crush.
CTA
See
Commodity
Trading Advisor.
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.
D
Daily Trading LimitThe 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.
Day Order
An order that
expires automatically at the end of each day's trading
session. There may be a day order with time contingency. For
example, an "off at a specific time" order is an order that
remains in force until the specified time during the session
is reached. At such time, the order is automatically
canceled.
Day Traders
Traders,
who take positions in commodities and then offset them prior
to the close of trading on the same trading day.
Deferred (Delivery) Month
The more distant month(s) in which futures trading are
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
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 date
on which the commodity or instrument of delivery must be
delivered to fulfill the terms of a contract.
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 Notice
The
written notice given by the seller of his intention to make
delivery against an open short futures position on a
particular date. This notice, delivered through the clearing
house, is separate and distinct from the warehouse receipt
or other instrument that will be used to transfer title.
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.
Derivative
A financial
instrument, traded on or off an exchange, the price of which
is directly dependent upon (i.e., "derived from") the value
of one or more underlying securities, equity indices, debt
instruments, commodities, other derivative instruments, or
any agreed upon pricing index or arrangement (e.g., the
movement over time of the Consumer Price Index or freight
rates). Derivatives involve the trading of rights or
obligations based on the underlying product, but do not
directly transfer property. They are used to hedge risk or
to exchange a floating rate of return for fixed rate of
return.
Differentials
Price
differences between classes, grades, and delivery locations
of various stocks of the same commodity.
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.
E
Equity
The residual
dollar value of a futures, option, or leverage trading
account, assuming it was liquidated at current prices.
Eurodollars
U.S.
dollars on deposit with a bank outside of the United States
and, consequently, outside the jurisdiction of the United
States. The bank could be either a foreign bank or a
subsidiary of a U.S. bank.
European Terms
A method
of quoting exchange rates, which measures the amount of
foreign currency needed to buy one U.S. dollar, i.e.,
foreign currency unit per dollar.
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 (Strike Price)
The price specified in the option contract at which the
buyer of a call can purchase the commodity during the life
of the option, and the price specified in the option
contract at which the buyer of a put can sell the commodity
during the life of the option.
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.
F
Face ValueThe 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
The
relationship of the cost of feed, expressed as a ratio to
the sale price of animals, such as the corn-hog ratio. These
serve as indicators of the profit margin or lack of profit
in feeding animals to market weight.
Fill-or-Kill
A customer order that is a price limit order
that must be filled immediately or canceled.
Financial Instrument
There are two basic types
(1) a debt instrument, which is a
loan with an agreement to pay back funds with interest; (2)
an equity security, which is a share or stock in a company.
First Notice Day
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.
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 exchange.
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.
G
GammaA 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.
Give Up
A contract
executed by one broker for the client of another broker that
the client orders to be turned over to the second broker.
The broker accepting the order from the customer collects a
wire toll from the carrying broker for the use of the
facilities. Often used to consolidate many small orders or
to disperse large ones.
GLOBEX
A global
after-hours electronic trading system. Developed by Reuters
Limited for use by the Chicago Mercantile Exchange (CME),
Globex was launched on June 25, 1992, for certain CME
contracts. Various MATIF (Marche a Terme International de
France) contracts began trading on the system on March 15,
1993.
Good 'Til Canceled Order (GTC)
Order which is valid at any time during market
hours until executed or canceled.
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.
H
HedgerAn 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.
High
The highest price
of the day for a particular futures contract.
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.
Hybrid-Instruments
Financial instruments that possess, in varying combinations,
characteristics of forward contracts, futures contracts,
option contracts, debt instruments, bank depository
interests, and other interests. Certain hybrid instruments
are exempt from CFTC regulation.
I
Initial MarginCustomers' funds put up as security for a guarantee of contract fulfillment at the time a futures market position is established.
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.
Intrinsic Value
The A
measure of the value of an option or a warrant if
immediately exercised. The amount by which the current price
for the underlying commodity or futures contract is above
the strike price of a call option or below the strike price
of a put option for the commodity or futures contract.
Introducing Broker (IB)
A person or organization that solicits or accepts orders to
buy or sell futures contracts or commodity options but does
not accept money or other assets from customers to support
such orders.
Inverted Market
A
futures market in which the relationship between two
delivery months of the same commodity is abnormal.
Invisible Supply
Uncounted stocks of a commodity in the hands of wholesalers,
manufacturers, and producers that cannot be identified
accurately; stocks outside commercial channels but
theoretically available to the market.
J
K
L
Lagging IndicatorsMarket 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
The maximum
price advance or decline from the previous day's settlement
price permitted during one trading session, as fixed by the
rules of an exchange.
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.
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 agricultural commodities.
Loan Rate
The amount
lent per unit of a commodity to farmers.
Local
A member of a
U.S. exchange who trades for his own account and/or fills
orders for customers and whose activities provide market
liquidity.
Long
One who has bought
futures contracts or owns a cash commodity.
Long the Basis
A person
or firm that has bought the spot commodity and hedged with a
sale of futures is said to be long the basis.
Low
The lowest price of
the day for a particular futures contract.
M
Maintenance MarginA set minimum margin (per outstanding futures contract) that a customer must maintain in his margin account.
Managed Account
See
Discretionary Account.
Managed Futures
Represents an industry comprised of professional money
managers known as commodity trading advisors who manage
client assets on a discretionary basis, using global futures
markets as an investment medium.
Margin
The amount of
money or collateral deposited by a customer with his broker,
by a broker with a clearing member, or by a clearing member
with the clearinghouse, for the purpose of insuring the
broker or clearinghouse against loss on open futures
contracts. The margin is not partial payment on a purchase.
(1) Initial margin is the total amount of margin per
contract required by the broker when a futures position is
opened; (2) Maintenance margin is a sum which must be
maintained on deposit at all times. If the equity in a
customer's account drops to, or under, the level because of
adverse price movement, the broker must issue a margin call
to restore the customer's equity.
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-if-Touched (MIT) Order
An order that becomes a
market order when a particular price is reached. A sell MIT
is placed above the market; a buy MIT is placed below the
market.
Market-on-Close
An
order to buy or sell at the end of the trading session at a
price within the closing range of prices.
Market-on-Opening
An
order to buy or sell at the beginning of the trading session
at a price within the opening range of prices.
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.
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
Smallest increment of price movement possible in trading a
given contract.
Momentum
In technical
analysis, the relative change in price over a specific time
interval. Often equated with speed or velocity and
considered in terms of relative strength.
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 accounts.
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.
N
Naked OptionThe sale of a call or put option without holding an offsetting position in the underlying commodity.
National Futures Association
(NFA)
An industry wide, industry-supported,
self-regulatory organization for futures and options
markets. The primary responsibilities of the NFA are to
enforce ethical standards and customer protection rules,
screen futures professionals for membership, audit and
monitor professionals for financial and general compliance
rules, and provide for arbitration of futures-related
disputes.
Nearby (Delivery) Month
The futures contract month closest to expiration. Also
referred to as spot month.
Negative Carry
The cost
of financing a financial instrument (the short-term rate of
interest), when the cost is above the current return of the
financial instrument. See Carrying Charges.
Net Position
The
difference between the open long contracts and the open
short contracts held by a trader in any one commodity
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..
O
OfferAn 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.
Omnibus Account
An
account carried by one futures commission merchant with
another futures commission merchant in which the
transactions of two or more persons are combined and carried
in the name of the originating broker rather than designated
separately.
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 Order (or Orders)
An order that remains in force until it is canceled or until
the futures contracts expire.
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.
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 originates an option contract by promising to
perform a certain obligation in return for the price of the
option.
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.
Overbought
A technical
opinion that the market price has risen too steeply and too
fast in relation to underlying fundamental factors. Rank and
file traders who were bullish and long have turned bearish.
Overnight Trade
A trade
which is not liquidated on the same trading day in which it
was established.
Oversold
A technical
opinion that the market price has declined too steeply and
too fast in relation to underlying fundamental factors. Rank
and file traders who were bearish and short have turned
bullish.
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
P&S (Purchase and Sale) StatementA 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.
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.
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.
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.
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.
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
(1) For
producers, their major purchaser of commodities; (2) in
commercial marketing channels, an important center at which
spot commodities are concentrated for shipment to terminal
markets; and (3) to processors, the market that is the major
supplier of their commodity needs.
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
In trade
parlance, non-professional speculators as distinguished from
hedgers and professional speculators or traders.
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.
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.
Pyramiding
The use of
profits on existing positions as margin to increase the size
of the position, normally in successively smaller
increments.
Q
R
Rally
An upward
movement of prices.
Range (Price)
The price
span during a given trading session, week, month, year, etc.
Recovery
An upward
price movement after a decline
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.
Resting Order
An order
to buy at a price below or to sell at a price above the
prevailing market that is being held by a floor broker. Such
orders may either be day orders or open orders.
Retracement
A reversal
within a major price trend.
Reversal
A change of
direction in prices.
Reverse Crush Spread
The sale of soybean futures and the simultaneous purchase
of soybean oil and meal futures. See Crush Spread.
Roll-Over
A trading
procedure involving the shift of one month of a straddle
into another future month while holding the other contract
month. The shift can take place in either the long or short
straddle month. The term also applies to lifting a near
futures position and re-establishing it in a more deferred
delivery month.
Round Turn
A completed
transaction involving both a purchase and a liquidating
sale, or a sale followed by a covering purchase.
Runners
Messengers who
rush orders received by phone clerks to brokers for
execution in the pit.
S
ScalperA speculator on the trading floor of an exchange who buys and sells rapidly, with small profits or losses, holding his positions for only a short time during a trading session. Typically, a scalper will stand ready to buy at a fraction below the last transaction price and to sell at a fraction above, thus creating market liquidity.
Scalping
The practice
of trading in and out of the market on very small price
fluctuations. A person who engages in this practice is known
as a scalper.
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.
Settlement
The act of
fulfilling the delivery requirements of the futures contract
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
The selling side
of an open futures contract.
Short Hedge
See
Selling
Hedge.
Short Selling
Selling a
futures contract with the idea of delivering on it or
offsetting it at a later date.
Soft
A description of a
price which is gradually weakening. Also refers to
commodities such as sugar, cocoa, and coffee.
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.
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.
Stock Index
An
indicator used to measure and report value changes in a
selected group of stocks. How a particular stock index
tracks the market depends on its composition the sampling of
stocks, the weighting of individual stocks, and the method
of averaging used to establish an index.
Stock Market
A market
in which shares of stock are bought and sold.
Stop-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.
Support
The place on a
chart where the buying of futures contracts is sufficient to
halt a price decline.
Synthetic Futures
A
position created by combining call and put options. A
synthetic long futures position is created by combining a
long call option and a short put option for the same
expiration date and the same strike price. A synthetic short
futures is created by combining a long put and a short call
with the same expiration date and the same strike price.
Systemic Risk
Market
risk due to price fluctuations which cannot be eliminated by
diversification.
T
Technical AnalysisAnticipating future price movement using historical prices, trading volume, open interest, and other trading data to study price patterns.
Tick
The smallest
allowable increment of price movement for a contract. Also
referred to as minimum price fluctuation.
Time 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.
Treasury Bill
See
U.S.
Treasury Bill.
Treasury Bond
See
U.S.
Treasury Bond.
Treasury Note
See
U.S.
Treasury Note.
Trend
The general
direction, either upward or downward, in which prices have
been moving.
Trendline
In charting,
a line drawn across the bottom or top of a price chart
indicating the direction or trend of price movement. If up,
the trendline is called bullish; if down, it is called
bearish.
U
Underlying Futures ContractThe 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.
V
Variable LimitAccording 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.
W
Warehouse ReceiptA document certifying possession of a commodity in a licensed warehouse that is recognized for delivery purposes by a commodity futures exchange.
Wash Trading
Entering
into, or purporting to enter into, transactions to give the
appearance that purchases and sales have been made, without
resulting in a change in the trader's market position.
Writer
The issuer,
grantor, or maker of an option contract.
X
Y
YieldA 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 credit
worthiness 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.