Commodity Futures Concepts, Definitions, Principles, Terms
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Commodity Glossary of Terms

Opportunity and Risk Glossary of Terms (771Kb pdf)

Commodity Futures Glossary


Actuals: See Cash Commodity.
Aggregation: The policy under which all futures positions owned or controlled by one trader or a group of traders are combined to determine reportable positions and speculative limits.
Arbitrage: The simultaneous purchase and sale of similar commodities in different markets to take advantage of a price discrepancy.
Arbitration: The process of resolving disputes between parties by a person or persons (arbitrators) chosen or agreed to by them. NFA's arbitration program provides a forum for resolving futures-related disputes between NFA Members or between Members and customers.
Associated Person (AP): An individual who solicits orders, customers or customer funds on behalf of a Futures Commission Merchant, an Introducing Broker, a Commodity Trading Advisor or a Commodity Pool Operator and who is registered with the Commodity Futures Trading Commission.
At-the-Money Option: An option whose strike price is equal or approximately equal to the current market price of the underlying futures contract.
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 of a commodity and the futures price of the same commodity.
Bear Market (Bear/Bearish): A market in which prices are declining. A market participant who believes prices will move lower is called a bear. A news item is considered bearish if it is expected to result in lower 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 of willingness to buy a commodity at a given price; the 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.
Bull Market (Bull/Bullish): A market in which prices are rising. A market participant who believes prices will move higher is called a bull. A news item is considered bullish if it is expected to result in higher 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 (American Style): An option which 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.
Carrying Broker: A member of a futures exchange, usually a clearinghouse member, through which another firm, broker or customer chooses to clear all or some trades.
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: The actual physical commodity as distinguished from the futures contract based on the physical commodity. 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 also Forward (Cash) Contract and Spot.
Cash Settlement: A method of settling certain futures or options contracts whereby the market participants settle in cash (payment of money rather than delivery of the commodity).
Charting: The use of graphs and charts in the technical analysis of futures markets to plot price movements, volume, open interest or other statistical indicators of price movement. See Technical Analysis.
Circuit Breaker: A system of trading halts and price limits on equities and derivatives markets designed to provide a cooling-off period during large, intraday market declines or rises.
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 members.
Clearinghouse: A corporation or separate division of a futures exchange that is responsible for settling trading accounts, collecting and maintaining margin monies, regulating delivery and reporting trade data. The clearinghouse becomes the buyer to each seller (and the seller to each buyer) and assumes responsibility for protecting buyers and sellers from financial loss by assuring performance on each contract.
Clearing Member: A member of an exchange clearinghouse responsible for the financial commitments of its customers.All trades of a non-clearing member must be registered and eventually settled through a clearing member.
Clearing Member: A member of an exchange clearinghouse. Memberships in clearing organizations are usually held by companies. Clearing members are responsible for the financial commitments of customers that clear through their firm.
Closing Price: See Settlement Price.
Closing Range: A range of prices at which buy and sell transactions took place during the close of the market.
Commission: A fee charged by a broker to a customer for executing a transaction.
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 Exchange Act (CEA): The federal act that provides for federal regulation of futures trading.
Commodity Futures Trading Commission (CFTC): The federal regulatory agency established in 1974 that administers the Commodity Exchange Act. The CFTC monitors the futures and options on futures markets in the United States.
Commodity Pool: An enterprise in which funds contributed by a number of persons are combined for the purpose of trading futures or options contracts. The concept is similar to a mutual fund in the securities industry. Also referred to as a Pool.
Commodity Pool Operator (CPO): An individual or organization which operates or solicits funds for a commodity pool. A CPO may be required to be registered with the CFTC.
Commodity Trading Adviser (CTA): A person who, for compensation or profit, directly or indirectly advises others as to the advisability of buying or selling futures or commodity options. Providing advice includes exercising trading authority over a customer's account. A CTA may be required to be registered with the CFTC.
Confirmation Statement: A statement sent by a Futures Commission Merchant to a customer when a futures or options position has been initiated. The statement shows the price and the number of contracts bought or sold. Sometimes combined with a Purchase and Sale Statement..
Contract Market: A board of trade designated by the CFTC to trade futures or options contracts on a particular commodity. Commonly used to mean any exchange on which futures are traded. Also referred to as an Exchange.
Contract Grades: See Deliverable Grades.
Contract Month: See The month in which delivery is to be made in accordance with the terms of the futures contract. Also referred to as Delivery Month.
Convergence: The tendency for prices of physical commodities and futures to approach one another, usually during the delivery month.
Cost of Carry (or Carry): See Carrying Charge.
Covered Option: A short call or put option position which is covered by the sale or purchase of the underlying futures contract or physical commodity.
Crop (Marketing) Year: The time span from harvest to harvest for agricultural commodities. The crop marketing year varies slightly with each ag commodity, but it tends to begin at harvest and end before the next year's harvest, e.g., the marketing year for soybeans begins September 1 and ends August 31. The futures contract month of November represents the first major new-crop marketing month, and the contract month of July represents the last major old-crop marketing month for soybeans.
Crop Reports: Reports compiled by the U.S. Department of Agriculture on various ag commodities that are released throughout the year. Information in the reports includes estimates on planted acreage, yield, and expected production, as well as comparison of production from previous years.
Cross-Hedging: Hedging a cash commodity using a different but related futures contract when there is no futures contract for the cash commodity being hedged and the cash and futures markets follow similar price trends (e.g., using soybean meal futures to hedge fish meal).
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 Segregated Funds: See Segregated Account.
Day Order: An order that if not executed expires automatically at the end of the trading session on the day it was entered.
Day Trader: A speculator who will normally initiate and offset a position within a single trading session.
Default: The failure to perform on a futures contract as required by exchange rules, such as a failure to meet a margin call or to make or take delivery.
Deferred Delivery Month: The distant delivery months in which futures trading is taking place, as distinguished from the nearby futures 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 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.
Derivative: A financial instrument, traded on or off an exchange, the price of which is directly dependent upon the value of one or more underlying securities, equity indices, debt instruments, commodities, other derivative instruments, or any agreed upon pricing index or arrangement. Derivatives involve the trading of rights or obligations based on the underlying product but do not directly transfer that product. They are generally used to hedge risk.
Designated Self-Regulatory Organization (DSRO): When a Futures Commission Merchant (FCM) is a member of more than one Self-Regulatory Organization (SRO), the SROs may decide among themselves which of them will be primarily responsible for enforcing minimum financial and sales practice requirements. The SRO will be appointed DSRO for that particular FCM. NFA is the DSRO for all non-exchange member FCMs. See also Self-Regulatory Organization.
Differentials: Price differences between classes, grades, and delivery locations of various stocks of the same commodity.
Disclosure Document: The statement that some CPOs must provide to customers. It describes trading strategy, fees, performance, etc.
Discount: (1) The amount a price would be reduced to purchase a commodity of lesser grade; (2) sometimes used to refer to the price differences between futures of different delivery months, as in the phrase "July is trading at a discount to May" indicating that the price of the July future is lower than that of May; (3) applied to cash grain prices that are below the futures price.
Discretionary Account: An arrangement by which the owner of the account gives written power of attorney to someone else, usually the broker or a Commodity Trading Advisor, to buy and sell without prior approval of the account owner. Also referred to as a 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.
Electronic Order: An order placed electronically (without the use of a broker) either via the Internet or an electronic trading system.
Electronic Trading Systems: Systems that allow participating exchanges to list their products for trading electronically. These systems may replace, supplement or run along side of the open outcry trading.
Equilibrium Price: The market price at which the quantity supplied of a commodity equals the quantity demanded.
Equity: 1) The value of a futures trading account if all open positions were offset at the current market price; 2) an ownership interest in a company, such as stock.
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. 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.
Expiration Date: Generally the last date on which an option may be exercised. It is not uncommon for an option to expire on a specified date during the month prior to the delivery month for the underlying futures contracts.
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 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 Ratio.
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: The first day on which notice of intent to deliver a commodity in fulfillment of an expiring futures contract can be given to the clearinghouse by a seller and assigned by the clearinghouse to a buyer. Varies from contract to contract.
Floor Broker: An individual who executes orders on the trading floor of an exchange for any other person.
Floor Trader: An individual who is a member of an exchange and trades for his own account on the floor of the exchange.
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 contract which requires a seller to agree to deliver a specified cash commodity to a buyer sometime in the future, where the parties expect delivery to occur. All terms of the contract may be customized, in contrast to futures contracts whose terms are standardized.
Full Carrying Charge Market: A futures market where the price difference between delivery months reflects the total costs of interest, insurance, and storage.
Fully Disclosed: An account carried by a Futures Commission Merchant in the name of an individual customer; the opposite of an Omnibus Account.
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. An FCM must be registered with the CFTC.
Futures Contract: A legally binding agreement to buy or sell a commodity or financial instrument at a later date. Futures contracts are normally standardized according to the quality, quantity, delivery time and location for each commodity, with price as the only variable.
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.
GLOBEX: A global 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.
Grantor: See Writer.
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 meal.
Guaranteed Introducing Broker: A Guaranteed Introducing Broker is an IB that has a written agreement with a Futures Commission Merchant that obligates the FCM to assume financial and disciplinary responsibility for the performance of the Guaranteed Introducing Broker in connection with futures and options customers. A Guaranteed Introducing Broker is not subject to minimum financial requirements.
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 opposite position in the futures market. A long hedge involves buying futures contracts to protect against possible increasing prices of commodities. A short hedge involves selling futures contracts to protect against possible declining prices of commodities.
High: The highest price of the day for a particular futures or options on 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: The opposite of a Grantor. 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.
In-the-Money Option: An option that has 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.
Independent Introducing Broker (IB): An Independent Introducing Broker is an IB subject to minimum capital requirements.
Initial Margin: The amount a futures market participant must deposit into a margin account at the time an order is placed to buy or sell a futures contract. See also 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.
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 firm or individual that solicits and accepts commodity futures orders from customers but does not accept money, securities or property from the customer. All Introducing Brokers must be registered with the CFTC.
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.
Last Trading Day: The last day on which trading may occur in a given futures or option.
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.
Limit: See Position Limit, Price Limit, Variable Limit.
Liquidate: To sell a previously purchased futures or options contract or to buy back a previously sold futures or options position. Also referred to as Offset.
Liquidity (Liquid Market): A characteristic of a security or commodity market with enough units outstanding and enough buyers and sellers to allow large transactions without a substantial change in price.
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 an exchange who trades for his own account.
Long: One who has bought futures contracts or options on futures contracts or owns a cash commodity.
Low: The lowest price of the day for a particular futures or options on futures contract.
Maintenance Margin: A set minimum amount (per outstanding futures contract) that a customer must maintain in his margin account to retain the futures position. See also Margin.
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: An amount of money deposited by both buyers and sellers of futures contracts and by sellers of options contracts to ensure performance of the terms of the contract (the making or taking delivery of the commodity or the cancellation of the position by a subsequent offsetting trade). Margin in commodities is not a down payment, as in securities, but rather a performance bond. See also Initial Margin, Maintenance Margin and Variation Margin.
Margin Call: A call from a clearinghouse to a clearing member, or from a broker or firm to a customer, to bring margin deposits up to a required minimum level.
Market Order: An order to buy or sell a futures or options contract at whatever price is obtainable when the order reaches the trading floor.
Market Profile: An 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 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.
Naked Option: See Uncovered Option.
National Futures Association (NFA): Authorized by Congress in 1974 and designated by the CFTC in 1982 as a registered futures association, NFA is the industrywide self-regulatory organization of the futures industry.
Nearby Delivery Month: The futures contract month closest to expiration. Also referred to as the Spot Month.
Negative Yield Curve: See Yield Curve.
Net Asset Value: The value of each unit of participation in a commodity pool. Basically a calculation of assets minus liabilities plus or minus the value of open positions when marked to the market, divided by the total number of outstanding units.
Net Performance: An increase or decrease in net asset value exclusive of additions, withdrawals and redemptions.
Offer: An indication of willingness to sell a futures contract at a given price; the opposite of Bid.
Offset: See Liquidate.
Omnibus Account: An account carried by one Futures Commission Merchant (FCM) with another FCM in which the transactions of two or more persons are combined and carried in the name of the originating FCM rather than of the individual customers; the opposite of Fully Disclosed.
Open: The period at the beginning of the trading session officially designated by the exchange during which all transactions are considered made at the open.
Opening Range: The 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: A method of public auction for making bids and offers in the trading pits of futures exchanges.
Open Trade Equity: The unrealized gain or loss on open positions.
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 a Holder.
Option Contract: A contract which gives the buyer the right, but not the obligation, to buy or sell a specified quantity of a commodity or a futures contract at a specific price within a specified period of time. The seller of the option has the obligation to sell the commodity or futures contract or to buy it from the option buyer at the exercise price if the option is exercised. See also Call Option and Put Option.
Option Premium: The price a buyer pays (and a seller receives) for an option. Premiums are arrived at through the market process. There are two components in determining this price extrinsic (or time) value and intrinsic value.
Option Seller: See Writer.
Option Spread: The simultaneous purchase and sale of one or more options contracts, futures, and/or cash positions.
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: A call option with a strike price higher or a put option with a strike price lower than the current market value of the underlying asset (i.e., an option that does not have any intrinsic value).
Over-the-Counter (OTC) Market: A market where products such as stocks, foreign currencies and other cash items are bought and sold by telephone, Internet and other electronic means of communication rather than on a designated futures exchange.
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.
Pit: The area on the trading floor where trading in futures or options contracts is conducted by open outcry. Also referred to as a ring.
Point-and-Figure Charts: Charts that show price changes of a minimum amount regardless of the time period involved.
Pool: See Commodity Pool.
Position: A commitment, either long or short, in the market.
Position Limit: The maximum number of speculative futures contracts one can hold as determined by the CFTC and/or the exchange where the contract is traded. See also Price Limit, Variable Limit.
Position Trader: A trader who either buys or sells contracts and holds them for an extended period of time, as distinguished from a day trader.
Positive Yield Curve: See Yield Curve.
Premium: Refers to (1) the price paid by the buyer of an option; (2) the price received by the seller of an option; (3) cash prices that are above the futures price; (4) the amount a price would be increased to purchase a better quality commodity; or (5) a futures delivery month selling at a higher price than another.
Price Discovery: The determination of the price of a commodity by the market process.
Price Limit: The maximum advance or decline, from the previous day's settlement price, permitted for a futures contract in one trading session. Also referred to as Maximum Price Fluctuation. See also Position Limit, 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.
Purchase and Sale Statement (P&S): A statement sent by a Futures Commission Merchant to a customer when a futures or options position has been liquidated or offset.The statement shows the number of contracts bought or sold, the prices at which the contracts were bought or sold, the gross profit or loss, the commission charges and the net profit or loss on the transaction. Sometimes combined with a Confirmation Statement.
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 which gives the buyer the right, but not the obligation, to sell the underlying futures contract at a particular price (strike or exercise price) on or before a particular date.
Quotation: The actual price or the bid or ask price of either cash commodities or futures or options contracts at a particular time.
Range: The difference between the high and low price of a commodity during a given trading session,week, month, year, etc.
Regulations (CFTC): The regulations adopted and enforced by the CFTC in order to administer the Commodity Exchange Act.
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.
Reparations: The term is used in conjunction with the CFTC's customer claims procedure to recover civil damages.
Reportable Positions: The number of open contracts specified by the CFTC when a firm or individual must begin reporting total positions by delivery month to the authorized exchange and/or the CFTC.
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.
Reverse Crush Spread: The sale of soybean futures and the simultaneous purchase of soybean oil and meal futures. See Crush Spread.
Round Turn: A completed futures transaction involving both a purchase and a liquidating sale, or a sale followed by a covering purchase.
Rules (NFA): The standards and requirements to which participants who are required to be Members of National Futures Association must subscribe and conform.
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.
Segregated Account: A special account used to hold and separate customers' assets for trading on futures exchanges from those of the broker or firm. Also referred to as Customer Segregated Funds.
Self-Regulatory Organization (SRO): Self-regulatory organizations (i.e., the futures exchanges and National Futures Association) enforce minimum financial and sales practice requirements for their members. See also Designated Self-Regulatory Organization.
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.
Settlement Price: The last price paid for a futures contract on any trading day. Settlement prices are used to determine open trade equity, margin calls and invoice prices for deliveries. Also referred to as Closing Price.
Short: One who has sold futures contracts or plans to purchase a cash commodity.
Short Hedge: See Selling Hedge.
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 for a physical commodity where the parties generally expect immediate delivery of the actual commodity.
Spot Month: See Nearby Delivery Month.
Spread: The price difference between two related markets or commodities.
Spreading: The buying and selling of two different delivery months or related commodities in the expectation that a profit will be made when the position is offset.
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.
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 that becomes a market order when the futures contract reaches a particular price level. A sell stop is placed below the market, a buy stop is placed above the market.
Strike Price: The price at which the buyer of a call (put) option may choose to exercise his right to purchase (sell) the underlying futures contract. Also called 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.
Technical Analysis: An approach to analysis of futures markets which examines patterns of price change, rates of change, and changes in volume of trading, open interest and other statistical indicators. See also Charting.
Tick: The smallest increment of price movement for a futures 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-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 options buyers are willing to pay for an option in 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.
Uncovered Option: A short call or put option position which is not covered by the purchase or sale of the underlying futures contract or physical commodity. Also referred to as a Naked Option.
Underlying Futures Contract: The specific futures contract that the option conveys the right to buy (in case of a call) or sell (in the case of a put).
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: A price system that allows for larger than normal allowable price movements under certain conditions. In periods of extreme volatility, some exchanges permit trading at price levels that exceed regular daily price limits. See also Position Limit, Price Limit.
Variation Margin: Additional margin required to be deposited by a clearing member firm to the clearinghouse during periods of great market volatility or in the case of high-risk accounts.
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.
Volume: The number of purchases and sales of futures contracts 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 futures transactions.
Wire House: See Futures Commission Merchant (FCM).
Writer: A person who sells an option and assumes the potential obligation to sell (in the case of a call) or buy (in the case of a put) the underlying futures contract at the exercise price. Also referred to as an Option Grantor.
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 creditwor thiness 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.

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