commonly used terms

8/6/2019 Commonly Used Terms

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Commonly Used Terms

Arbitrage - The simultaneous purchase and

sale of similar commodities in different

markets to take advantage of a price

discrepancy.

Arbitration - The process of settling disputes

between parties by a person or persons

chosen or agreed to by them.


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Commonly Used Terms

At-the-Money Option - An option whose strike price isequalor approximately equalto the current marketprice of the underlying futures contract.

Backwardation - A theory developed in respect to theprice of a futures contract and the contract's time toexpire. Backwardation says that as the contractapproaches expiration, the futures contract will tradeat a higher price compared to when the contract wasfurther away from expiration. This is said to occur dueto the convenience yield being higher than theprevailing risk free rate.


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Commonly Used Terms

Basis - The difference between the current cashprice of a commodity and the futures price of thesame commodity.

Basis = Futures Spot

Bear Market (Bear/Bearish) - A market in which

prices are declining. A market participant whobelieves prices will move lower is called a bear.Anews item is considered bearish if it is expectedto result in lower prices.


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Commonly Used Terms

Bid - An expression of willingness to buy acommodity at a given price; the opposite ofOffer.

Bull Market (Bull/Bullish) - A market in whichprices are rising. A market participant who

believes prices will move higher is called abull. A news item is considered bullish if it isexpected to result in higher prices.


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Commonly Used Terms

Call Option - 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.


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Commonly Used Terms

Carrying Charge - The cost of storing a physicalcommodity, such as grain or metals, over a periodof time. The carrying charge includes insurance,storage and interest on the invested funds as wellas other incidental costs. Also referred to as Costof Carry.

Cash Commodity - The actual physical commodityas distinguished from the futures contract basedon the physical commodity. Also referred to asActuals.


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Commonly Used Terms

Cash Settlement - A method of settling certainfutures or options contracts whereby themarket participants settle in cash (rather than

delivery of the commodity).

Circuit Breaker - A system of trading halts and

price limits on equities and derivativesmarkets designed to provide a cooling-offperiod during large, intraday market declines.


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Commonly Used Terms

Clearinghouse - An agency or separatecorporation of a futures exchange that is

responsible for settling trading accounts,collecting and maintaining margin monies,regulating delivery and reporting trade data. Theclearinghouse becomes the buyer to each seller(and the seller to each buyer) and assumes

responsibility for protecting buyers and sellersfrom financial loss by assuring performance oneach contract.


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Commonly Used Terms

Clearing Member - A member of an exchange clearinghouseresponsible for the financial commitments of its customers.All trades of a non-clearing member must be registered and

eventually settled through a clearing member.

Contango - is when the futures price is above the expectedfuture spot price. Because the futures price must convergeon the expected future spot price, contango implies that

futures prices are falling over time as new informationbrings them into line with the expected future spot price,


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Commonly Used Terms

Contract Month - The month in which deliveryis to be made in accordance with the terms ofthe futures contract. Also referred to as

Delivery Month.

Convergence - The tendency for prices of

physical commodities and futures to approachone another, usually during the deliverymonth.


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Commonly Used Terms

Covered Option - A short call or put optionposition which is covered by the sale or purchaseof the underlying futures contract or physicalcommodity.

Cross-Hedging - Hedging a cash commodity usinga different but related futures contract whenthere is no futures contract for the cashcommodity being hedged and the cash andfutures market follow similar price trends (e.g.,using soybean meal futures to hedge fish meal).


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Commonly Used Terms

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.


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Commonly Used Terms

Default - The failure to perform on a futures contract asrequired by exchange rules, such as a failure to meet amargin call or to make or take delivery.

Derivative - A financial instrument, traded on or off anexchange, the price of which is directly dependent upon thevalue of one or more underlying securities, equity indices,debt instruments, commodities, other derivativeinstruments, or any agreed upon pricing index or

arrangement. Derivatives involve the trading of rights orobligations based on the underlying product but do notdirectly transfer property. They are used to hedge risk or toexchange a floating rate of return for a fixed rate of return.


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Commonly Used Terms

Futures Contract - A legally binding agreement to buy or sella commodity or financial instrument at a later date. Futurescontracts are standardized according to the quality, quantityand delivery time and location for each commodity. The

only variable is price.

Hedging - The practice of offsetting the price risk inherent inany cash market position by taking an equal but oppositeposition in the futures market. A long hedge involves buying

futures contracts to protect against possible increasingprices of commodities. A short hedge involves sellingfutures contracts to protect against possible declining pricesof commodities.


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Commonly Used Terms

In-the-Money Option - An option that has intrinsicvalue. A call option is in-the-money if its strikeprice is below the current price of the underlyingfutures contract. A put option is in-the-money ifits strike price is above the current price of theunderlying futures contract.

Initial Margin - The amount a futures marketparticipant must deposit into a margin account atthe time an order is placed to buy or sell a futurescontract.


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Commonly Used Terms

Intrinsic Value - The amount by which an

option is in-the-money.

Leverage - The ability to control large dollar

amounts of a commodity with a comparatively

small amount of capital.


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Commonly Used Terms

Liquidate - To take a second futures or options positionopposite to the initial or opening position. To sell (orpurchase) futures contracts of the same delivery monthpurchased (or sold) during an earlier transaction or make

(or take) delivery of the cash commodity represented by thefutures market. Also referred to as Offset.

Liquidity (Liquid Market) - A characteristic of a security orcommodity market with enough units outstanding to allowlarge transactions without a substantial change in price.


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Commonly Used Terms

Long - One who has bought futures contracts

or owns a cash commodity.

Maintenance Margin - A set minimum margin

(per outstanding futures contract) that a

customer must maintain in his margin account

to retain the futures position.


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Commonly Used Terms

Margin - An amount of money deposited by bothbuyers and sellers of futures contracts and by sellers ofoptions contracts to ensure performance of the termsof the contract (the making or taking delivery of thecommodity or the cancellation of the position by asubsequent offsetting trade).

Margin Call - A call from a clearinghouse to a clearingmember, or from a broker or firm to a customer, tobring margin deposits up to a required minimum level.


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Commonly Used Terms

Mark-to-Market - To debit or credit on a dailybasis a margin account based on the close of thatdays trading session. In this way, buyers and

sellers are protected against the possibility ofcontract default.

Market Order - An order to buy or sell a futures oroptions contract at whatever price is obtainablewhen the order reaches the trading floor.


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Commonly Used Terms

Naked Option - A short call or put option position which isnot covered by the purchase or sale of the underlyingfutures contract or physical commodity.

An opening transaction in an option when theunderlying asset is not owned. An investor writing a calloption on 100 shares of IBM without owning the stockis writing a naked option. If the stock is called by theoption holder, the writer must purchase shares in themarket for delivery and is therefore caught naked. Alsocalled uncovered option


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Commonly Used Terms

Open Outcry - A method of public auction for makingbids and offers in the trading pits of futures exchanges.

Option Contract - A contract which gives the buyer theright, but not the obligation, to buy or sell a specifiedquantity of a commodity or a futures contract at aspecific price within a specified period of time. Theseller of the option has the obligation to sell the

commodity or futures contract or buy it from theoption buyer at the exercise price if the option isexercised.


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Commonly Used Terms

Option Premium - The price a buyer pays (and aseller receives) for an option. Premiums arearrived at through open outcry. There are twocomponents in determining this priceextrinsic(or time) value and intrinsic value.

Out-of-the-Money Option - A call option with astrike price higher or a put option with a strike

price lower than the current market value of theunderlying asset, (i.e., an option that does nothave any intrinsic value).


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Commonly Used Terms

Over-the-Counter Market (OTC) - A market whereproducts such as stocks, foreign currencies andother cash items are bought and sold by

telephone and other electronic means ofcommunication rather than on a designatedfutures exchange.

Overbought - A technical opinion that the marketprice has risen too steeply and too fast in relationto underlying fundamental factors.


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Commonly Used Terms

Oversold - A technical opinion that the market

price has declined too steeply and too fast in

relation to underlying fundamental factors.

Par - The face value of a security.

Position - A commitment, either long or short,

in the market.


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Commonly Used Terms

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.

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 orexercise price) on or before a particular date.


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Commonly Used Terms

Pyramiding - The use of unrealized profits on

existing futures positions as margin to increase

the size of the position, normally in

successively smaller increments.

Range - The difference between the high and

low price of a commodity during a given

trading session, week, month, year, etc.


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Commonly Used Terms

Scalper - A trader who trades for small, short-term profits during the course of a tradingsession, rarely carrying a position overnight.

Settlement Price - The last price paid for afutures contract on any trading day.

Settlement prices are used to determine opentrade equity, margin calls and invoice prices fordeliveries.


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Commonly Used Terms

Short - One who has sold futures contracts orplans to purchase a cash commodity.

Speculator - A market participant who tries toprofit from buying and selling futures andoptions contracts by anticipating future price

movements. Speculators assume market pricerisk and add liquidity and capital to the futuresmarkets.


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Commonly Used Terms

Stop Order - An order that becomes a marketorder when the futures contract reaches aparticular price level. A sell stop is placed below

the market, a buy stop is placed above themarket.

Strike Price - The price at which the buyer of a call

(put) option may choose to exercise his right topurchase (sell) the underlying futures contract.Also called Exercise Price.


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Commonly Used Terms

Technical Analysis - An approach to analysis offutures markets which examines patterns ofprice change, rates of change, and changes in

volume of trading, open interest and otherstatistical indicators.

Tick - The smallest allowable increment ofprice movement for a futures contract. Alsoreferred to as Minimum Price Fluctuation.


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Commonly Used Terms

Time Value - The amount of money optionsbuyers are willing to pay for an option inanticipation that over time a change in the

underlying futures price will cause the optionto increase in value. In general, an optionpremium is the sum of time value and intrinsicvalue. Any amount by which an option

premium exceeds the options intrinsic valuecan be considered time value. Also referred toas Extrinsic Value.


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Commonly Used Terms

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.

Variation Margin - Additional margin required to

be deposited by a clearing member firm to theclearinghouse during periods of great market

volatility or in the case of high-risk accounts.


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Commonly Used Terms

Volatility - A measurement of the change in price over agiven time period.

Volume - The number of purchases and sales of futures

contracts made during a specified period of time, often thetotal transactions for one trading day.

Warehouse Receipt - A document guaranteeing the

existence and availability of a given quantity and quality of acommodity in storage; commonly used as the instrument oftransfer of ownership in both cash and futures transactions.


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Commonly Used Terms

Yield - A measure of the annual return on an

investment.

Yield Curve - A chart in which yield level is

plotted on the vertical axis, and the term to

maturity of debt instruments of similar

creditworthiness is plotted on the horizontal

axis.

commonly used terms

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