Futures Trading Glossary

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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.

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.

Job Lot: A form of contract having a smaller unit of trading than is featured in a regular contract.

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Kerb Trading or Dealing: See Curb Trading.

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Lagging Indicators: Market indicators showing the general direction of the economy and confirming or denying the trend implied by the leading indicators. Also referred to as concurrent indicators.

Last Trading Day: According to the Chicago Board of Trade rules, the final day when trading may occur in a given futures or options contract month. Futures contracts outstanding at the end of the last trading day must be settled by delivery of the underlying commodity or securities or by agreement for monetary settlement (in some cases by EFPs).

Leading Indicators: Market indicators that signal the state of the economy for the coming months. Some of the leading indicators include: average manufacturing workweek, initial claims for unemployment insurance, orders for consumer goods and material, percentage of companies reporting slower deliveries, change in manufacturers' unfilled orders for durable goods, plant and equipment orders, new building permits, index of consumer expectations, change in material prices, prices of stocks, change in money supply.

Limits: See Position Limit, Price Limit, Variable Limit.

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. 

Loan Rate: The amount lent per unit of a commodity to farmers.

Long: One who has bought futures contracts or owns a cash commodity. Long Hedge: See Purchasing Hedge.

Low: The lowest price of the day for a particular futures contract.

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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 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 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 Profile.: A Chicago Board of Trade information service that helps technical traders analyze price trends. Market Profile consists of the Time and Sales ticker and the Liquidity Data Bank.

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.

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.

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National Futures Association (NFA): An industrywide, 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.

Notice Day: According to Chicago Board of Trade rules, the second day of the three-day delivery process when the clearing corporation matches the buyer with the oldest reported long position to the delivering seller and notifies both parties. See First Notice Day.

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Offer: An expression indicating one's desire to sell a commodity at a given price; opposite of bid.

OPEC: Organization of Petroleum Exporting Countries, emerged as the major petroleum pricing power in 1973, when the ownership of oil production in the Middle East transferred from the operating companies to the governments of the producing countries or to their national oil. Members are: Algeria, Ecuador, Gabon, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.

Open Interest: The total number of futures or options contracts of a given commodity that have not yet been offset by an opposite futures or option transaction nor fulfilled by delivery of the commodity or option exercise. Each open transaction has a buyer and a seller, but for calculation of open interest, only one side of the contract is counted.

Open Market Operation: The buying and selling of government securities Treasury bills, notes, and bonds by the Federal Reserve.

Open Outcry: Method of public auction for making verbal bids and offers in the trading pits or rings of futures exchanges.

Option: A contract that conveys the right, but not the obligation, to buy or sell a particular item at a certain price for a limited time. Only the seller of the option is obligated to perform.

Option Buyer: The purchaser of either a call or put option. Option buyers receive the right, but not the obligation, to assume a futures position. Also referred to as the holder.

Option Premium: The price of an option the sum of money that the option buyer pays and the option seller receives for the rights granted by the option.

Option Seller: The person who sells an option in return for a premium and is obligated to perform when the holder exercises his right under the option contract. Also referred to as the writer.

Option Spread: The simultaneous purchase and sale of one or more options contracts, futures, and/or cash positions.

Option Writer: See Option Seller.

Original Margin: The amount a futures market participant must deposit into his commodity 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.

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P&S (Purchase and Sale) Statement: A statement sent by a commission house to a customer when his futures or options on futures position has changed, showing the number of contracts bought or sold, the prices at which the contracts were bought or sold, the gross profit or loss, the commission charges, and the net profit or loss on the transactions.

Payment-In-Kind (PIK) Program: A government program in which farmers who comply with a voluntary acreage-control program and set aside an additional percentage of acreage specified by the government receive certificates that can be redeemed for government-owned stocks of grain.

Performance Bond Margin: The amount of money deposited by both a buyer and seller of a futures contract or an options seller to ensure performance of the term of the contract. Margin in commodities is not a payment of equity or down payment on the commodity itself, but rather it is a security deposit.

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 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.

Price Discovery: The generation of information about "future" cash market prices through the futures markets.

Price Limit: The maximum advance or decline from the previous day's settlement price permitted for a contract in one trading session by the rules of the exchange. See also Variable Limit.

Price Limit Order: A customer order that specifies the price at which a trade can be executed.

Primary Dealer: A designation given by the Federal Reserve System to commercial banks or broker/dealers who meet specific criteria. Among the criteria are capital requirements and meaningful participation in the Treasury auctions.

Primary Market: Market of new issues of securities.

Producer Price Index (PPI): An index that shows the cost of resources needed to produce manufactured goods during the previous month.

Purchasing Hedge (or Long Hedge): Buying futures contracts to protect against a possible price increase of cash commodities that will be purchased in the future. At the time the cash commodities are bought, the open futures position is closed by selling an equal number and type of futures contracts as those that were initially purchased. Also referred to as a buying hedge. See Hedging.

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

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Range (Price): The price span during a given trading session, week, month, year, etc.

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.

Resistance: A level above which prices have had difficulty penetrating.

Resumption: The reopening the following day of specific futures and options markets that also trade during the evening session at the Chicago Board of Trade.

Reverse Crush Spread: The sale of soybean futures and the simultaneous purchase of soybean oil and meal futures. See Crush Spread.

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

Secondary Market: Market where previously issued securities are bought and sold.

Selling Hedge (or Short Hedge): Selling futures contracts to protect against possible declining prices of commodities that will be sold in the future. At the time the cash commodities are sold, the open futures position is closed by purchasing an equal number and type of futures contracts as those that were initially sold. See Hedging.

Settle: See Settlement Price.

Settlement Price: The last price paid for a commodity on any trading day. The exchange clearinghouse determines a firm's net gains or losses, margin requirements, and the next day's price limits, based on each futures and options contract settlement price. If there is a closing range of prices, the settlement price is determined by averaging those prices. Also referred to as settle or closing price.

Series: All option contracts of the same class that also have the same expiration date and strike price.

Short: (noun) One who has sold futures contracts or plans to purchase a cash commodity. (verb) Selling futures contracts or initiating a cash forward contract sale without offsetting a particular market position.

Short Hedge: See Selling Hedge.

Speculator: A market participant who tries to profit from buying and selling futures and options contracts by anticipating future price movements. Speculators assume market price risk and add liquidity and capital to the futures markets.

Spot: Usually refers to a cash market price for a physical commodity that is available for immediate delivery.

Spot Month: See Nearby (Delivery) Month.

Spread: The price difference between two related markets or commodities.

Spreading: The simultaneous buying and selling of two related markets in the expectation that a profit will be made when the position is offset. Examples include: buying one futures contract and selling another futures contract of the same commodity but different delivery month; buying and selling the same delivery month of the same commodity on different futures exchanges; buying a given delivery month of one futures market and selling the same delivery month of a different, but related, futures market.

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

Stock Index: An indicator used to measure and report value changes in a selected group of stocks. How a particular stock index tracks the market depends on its composition the sampling of stocks, the weighting of individual stocks, and the method of averaging used to establish an index.

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.

Straddle: The simultaneous sale or purchase of both a call and a put with the same expiration month and with the same strike price.

Strangle: The simultaneous sale or purchase of both a call and a put with the same expiration month and different strike prices.

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.

Suspension: The end of the evening session for specific futures and options markets traded at the Chicago Board of Trade.

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Technical Analysis: Anticipating 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.

Trade Balance: The difference between a nation's imports and exports of merchandise. Trading Limit: See Position Limit.

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Uncovered Call Option Writing: A short call option position in which the writer does not own an equivalent position in the underlying security represented by their option contracts.

Uncovered Put Option Writing: A short put option position in which the writer does not have a corresponding short position in the underlying security or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the 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.

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Variable Limit: According to the Chicago Board of Trade rules, an expanded allowable price range set during volatile markets.

Variation Margin: During periods of great market volatility or in the case of high-risk accounts, additional margin deposited by a clearing member firm to an exchange clearinghouse.

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.

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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).

Winter Wheat: Wheat that is planted in the fall, lies dormant during the winter, and is harvested beginning about May of the next year.

Writer: See Option Seller.

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Yield Curve: A graphic representation of market yield for a fixed income security plotted against the maturity of the security. The yield curve is positive when long-term rates are higher than short-term rates.

Yield to Maturity: The rate of return an investor receives if a fixed income security is held to maturity.

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Zero Coupon: Refers to a debt instrument that does not make coupon payments, but, rather, is issued at a discount to par and redeemed at par at maturity.

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I J K L M N O P Q R S T U V W X Y Z - PG.1 A-H