Futures Trading Glossary

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Actuals: See Cash Commodity.

Add-on Method: A method of paying interest where the interest is added onto the principal at maturity or interest payment dates.

Adjusted Futures Price: The cash-price equivalent reflected in the current futures price. This is calculated by taking the futures price times the conversion factor for the particular financial instrument (e.g., bond or note) being delivered.

Against Actuals: See Exchange For Physicals.

All or None Order: An order which must be filled for the full size of the order before it can be executed.

American-style Option: An option contract that may be exercised at any time between the date of purchase and the expiration date.

Arbitrage: The simultaneous purchase and sale of similar commodities in different markets to take advantage of a price discrepancy.

Ask: The price at which a seller will sell a futures contract.

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).

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.

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Balance of Payment: A summary of the international transactions of a country over a period of time including commodity and service transactions, capital transactions, and gold movements.

Bar Chart: A chart that graphs the high, low, and settlement prices for a specific trading session over a given period of time.

Basis: The difference between the current cash price and the futures price of the same commodity. Unless otherwise specified, the price of the nearby futures contract month is generally used to calculate the basis.

Bear Spread: In most commodities and financial instruments, the term refers to selling the nearby contract month, and buying the deferred contract, to profit from a change in the price relationship.

Bid: An expression indicating a desire to buy a futures contract at a given price; opposite of offer.

Board of Trade Clearing Corporation: An independent corporation that settles all trades made at the Chicago Board of Trade acting as a guarantor for all trades cleared by it, reconciles all clearing member firm accounts each day to ensure that all gains have been credited and all losses have been collected, and sets and adjusts clearing member firm margins for changing market conditions. Also referred to as clearing corporation. See Clearinghouse.

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.

Brokerage House: See Futures Commission Merchant.

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 inter-delivery spreads in opposite directions with the center delivery month common to both spreads.

Buying Hedge: See Purchasing Hedge.

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Calendar Spread: The simultaneous sale and purchase of either calls or puts with the same strike price but different expiration months. See Inter-delivery Spread and Horizontal Spread.

Call Option: An option that gives the buyer the right, but not the obligation, to purchase (go "long") the underlying futures contract at the strike price on or before the expiration date.

Canceling Order: An order that deletes a customer's previous order.

Carrying Charge: For physical commodities such as grains and metals, the cost of storage space, insurance, and finance charges incurred by holding a physical commodity. In interest rate futures markets, it refers to the differential between the yield on a cash instrument and the cost of funds necessary to buy the instrument. Also referred to as cost of carry or carry.

Carryover: Grain and oilseed commodities not consumed during the marketing year and remaining in storage at year's end. These stocks are "carried over" into the next marketing year and added to the stocks produced during that crop year.

Cash Commodity: An actual physical commodity someone is buying or selling, e.g., soybeans, corn, gold, silver, Treasury bonds, etc. Also referred to as actuals.

Cash Contract: A sales agreement for either immediate or future delivery of the actual product.

Cash Market: A place where people buy and sell the actual commodities, i.e., grain elevator, bank, etc. See Spot and Forward Contract.

Cash Settlement: Transactions generally involving index-based futures contracts that are settled in cash based on the actual value of the index on the last trading day, in contrast to those that specify the delivery of a commodity or financial instrument.

Charting: The use of charts to analyze market behavior and anticipate future price movements. Those who use charting as a trading method plot such factors as high, low, and settlement prices; average price movements; volume; and open interest. Two basic price charts are bar charts and point-and-figure charts. See Technical Analysis.

Cheapest to Deliver: A method to determine which particular cash debt instrument is most profitable to deliver against a futures contract.

Class of Options: Option contracts of the same type (call or put) and style (American, European or Capped) that cover the same underlying security.

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: A range of prices at which buy and sell transactions took place during the market close.

Closing Transaction: A transaction in which at some point prior to expiration, the option holder makes an offsetting sale of an identical option, or the option writer makes an offsetting purchase of an identical option. A closing transaction in an option reduces or cancels out an investor's previous position as the holder or the writer of that option.

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.

Commodity Credit Corporation (CCC): A branch of the U.S. Department of Agriculture, established in 1933, that supervises the government's farm loan and subsidy programs.

Commodity Futures Trading Commission (CFTC): A federal regulatory agency established under the Commodity Futures Trading Commission Act, as amended in 1974, that oversees futures trading in the United States. The commission is comprised of five commissioners, one of whom is designated as chairman, all appointed by the President subject to Senate confirmation, and is independent of all cabinet departments.

Commodity Pool: An enterprise in which funds contributed by a number of persons are combined for the purpose of trading futures contracts or commodity options.

Commodity Pool Operator (COP): An individual or organization that operates or solicits funds for a commodity pool.

Commodity Trading Adviser (CTA): A person who, for compensation or profit, directly or indirectly advises others as to the value or the advisability of buying or selling futures contracts or commodity options. Advising indirectly includes exercising trading authority over a customer's account as well as providing recommendations through written publications or other media.

Concurrent Indicators: See Lagging Indicators.

Consumer Price Index (CPI): A major inflation measure computed by the U.S. Department of Commerce. It measures the change in prices of a fixed market basket of some 385 goods and services in the previous month.

Contract Month: See Delivery Month.

Convergence: A term referring to cash and futures prices tending to come together (i.e., the basis approaches zero) as the futures contract nears expiration.

Cost of Carry (or Carry): See Carrying Charge.

Coupon: The interest rate on a debt instrument expressed in terms of a percent on an annualized basis that the issuer guarantees to pay the holder until maturity.

Covered Call Option Writing: A strategy in which one sells call options while simultaneously owning an equivalent position in the underlying security

Covered Put Option Writing: A strategy in which one sells puts and simultaneously is short an equivalent position in the underlying security.

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.

Currency Option: The right to buy or sell one currency against another currency at a specified price during a specified period.

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Daily Trading Limit: The maximum price range set by the exchange each day for a contract. Day Traders: Speculators who take positions in futures or options contracts and liquidate them prior to the close of the same trading day.

Day Order: An order which remains in effect only until executed or until the end of the trading session.

Deferred (Delivery) Month: The more distant month(s) in which futures trading is taking place, as distinguished from the nearby (delivery) month.

Deliverable Grades: The standard grades of commodities or instruments listed in the rules of the exchanges that must be met when delivering cash commodities against futures contracts. Grades are often accompanied by a schedule of discounts and premiums allowable for delivery of commodities of lesser or greater quality than the standard called for by the exchange. Also referred to as contract grades.

Delivery: The transfer of the cash commodity from the seller of a futures contract to the buyer of a futures contract. Each futures exchange has specific procedures for delivery of a cash commodity. Some futures contracts, such as stock index contracts, are cash settled.

Delivery Day: The third day in the delivery process at the Chicago Board of Trade, when the buyer's clearing firm presents the delivery notice with a certified check for the amount due at the office of the seller's clearing firm.

Delivery Month: A specific month in which delivery may take place under the terms of a futures contract. Also referred to as contract month.

Delivery Points: The locations and facilities designated by a futures exchange where stocks of a commodity may be delivered in fulfillment of a futures contract, under procedures established by the exchange.

Delta: A measure of how much an option premium changes, given a unit change in the underlying futures price. Delta often is interpreted as the probability that the option will be in-the-money by expiration.

Differentials: Price differences between classes, grades, and delivery locations of various stocks of the same commodity.

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Equilibrium Price: The market price at which the quantity supplied of a commodity equals the quantity demanded.

Eurodollars: U.S. dollars on deposit with a bank outside of the United States and, consequently, outside the jurisdiction of the United States. The bank could be either a foreign bank or a subsidiary of a U.S. bank.

European-style Option: An option contract that may be exercised only during a specified period of time just prior to expiration 

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.

Exercise Settlement Amount: The difference between the exercise price of the option and the exercise settlement value of the index on the day an exercise notice is tendered, multiplied by the index multiplier.

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 Cycle: An expiration cycle relates to the dates on which options on a particular underlying security expire. A given option, other than LEAPS®, will be assigned to one of three cycles, the January cycle, the February cycle or the March cycle.

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.

Expiration Time: The time of day by which all exercise notices must be received on the expiration date.

Extrinsic Value: See Time Value.

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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.

First Notice Day: According to Chicago Board of Trade rules, the first day on which a notice of intent to deliver a commodity in fulfillment of a given month's futures contract can be made by the clearinghouse to a buyer. The clearinghouse also informs the sellers who they have been matched up with.

Floor Broker (FB): An individual who executes orders for the purchase or sale of any commodity futures or options contract on any contract market for any other person.

Floor Trader (FT): An individual who executes trades for the purchase or sale of any commodity futures or options contract on any contract market for such individual's own account.

Foreign Exchange Market: See Forex Trading Glossary

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.

Fundamental Analysis: A method of anticipating future price movement using supply and demand information.

Futures Commission Merchant (FCM): An individual or organization that solicits or accepts orders to buy or sell futures contracts or options on futures and accepts money or other assets from customers to support such orders. Also referred to as commission house or wire house.

Futures Contract: A legally binding agreement, made on the trading floor of a futures exchange, to buy or sell a commodity or financial instrument sometime in the future. Futures contracts are standardized according to the quality, quantity, and delivery time and location for each commodity. The only variable is price, which is discovered on an exchange trading floor.

Futures Exchange: A central marketplace with established rules and regulations where buyers and sellers meet to trade futures and options on futures contracts.

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GLOBEX.: A global after-hours electronic trading system.

Good-Till-Cancelled Order: An order which remains in effect until it is canceled or executed.

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.

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Hedger: An individual or company owning or planning to own a cash commodity corn, soybeans, wheat, U.S. Treasury bonds, notes, bills, etc. and concerned that the cost of the commodity may change before either buying or selling it in the cash market. A hedger achieves protection against changing cash prices by purchasing (selling) futures contracts of the same or similar commodity and later offsetting that position by selling (purchasing) futures contracts of the same quantity and type as the initial transaction.

Hedging: The practice of offsetting the price risk inherent in any cash market position by taking an equal but opposite position in the futures market. Hedgers use the futures markets to protect their businesses from adverse price changes. See Selling (Short) Hedge and Purchasing (Long) Hedge.

Hog/Corn Ratio: The relationship of feeding costs to the dollar value of hogs. It is measured by dividing the price of hogs ($/hundredweight) by the price of corn ($/bushel). When corn prices are high relative to pork prices, fewer units of corn equal the dollar value of 100 pounds of pork. Conversely, when corn prices are low in relation to pork prices, more units of corn are required to equal the value of 100 pounds of pork. See Feed Ratio.

Holder: See Option Buyer.

Horizontal Spread: The purchase of either a call or put option and the simultaneous sale of the same type of option with typically the same strike price but with a different expiration month. Also referred to as a calendar spread.

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Immediate Order: An order which must be executed in whole or part when voiced or else canceled.

Initial Margin: See Original Margin.

Inter-commodity 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.

Inter-delivery 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 intra-market or calendar spread.

Inter-market 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.

Intra-market Spread: See Inter-delivery Spread.

Intrinsic Value: The amount by which an option is in-the-money. See In-the-Money Option.

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