Term
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Definition
| – the cash or physical, commodity. The goods underlying a futures contract. |
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Term
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Definition
| Arbitrage – the purchase of a commodity against the immediate sale of a commodity to gain from unequal prices. The two transactions may occur on different exchanges, among two different commodities, in different delivery months, or between the futures and cash markets. Look-up “Spreading”. |
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Term
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Definition
| Basis – the difference between the cash price and the futures price of a commodity. CASH – FUTURES = BASIS. Basis also is used to refer to the difference between prices at different markets or between different commodity grades. |
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Term
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Definition
| Bear Spread – sale of near-month futures contracts against the purchase of deferred month futures contracts in expectation of a price drop in the near month relative to the more distant month. For example: selling a January contract and purchasing the more distant April contract. |
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Term
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Definition
| Bear Spread – sale of near-month futures contracts against the purchase of deferred month futures contracts in expectation of a price drop in the near month relative to the more distant month. For example: selling a January contract and purchasing the more distant April contract. |
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Term
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Definition
| Broker – an agent who executes trades (purchase or sell orders) for clients. They receive a commission for their services. Other terms used to describe a broker include: AP (Associated Person), AE (Account Executive), National Futures Association (NFA) Associate, RCR (Registered Commodity Representative). |
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Term
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Definition
| Bull Spread – the purchase of near-month futures contracts against the sale of deferred month futures contracts in expiration of a price increase in the near-month relative to the deferred. One form of a bull spread, the limited risk spread, is placed only when the market is near full carrying charges. Look-up “Limited Risk Spread”. |
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Term
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Definition
| Call – the period at the market opening or closing during which futures prices are established by auction. |
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Term
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Definition
| Call Option – a contract giving the purchaser the right to buy something with a specified period of time at a specified price. The seller receives money for the sale of this right. The contract also obligates the seller to deliver, of the purchaser exercises their right to buy. |
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Term
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Definition
| Carrying charges – the cost of storing a physical commodity, which consist of insurance, interest and storage fees. Carrying costs typically are reflected in the difference between the futures prices for different delivery months. |
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Term
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Definition
| Cash Commodity – a physical commodity, as distinguished from a futures contract, which calls for the delivery of the “cash commodity” during the delivery period. |
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Term
| CDs (Certificate of Deposits) |
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Definition
| CDs (Certificate of Deposits) – a huge time deposit with a bank, having a specific maturity dates stated on the certificate. Certificates of deposit (CDs) usually are issued with $100,000.00 to $1,000,000.00 face value. |
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Term
| CFTC (Commodity Futures Trading Commission) |
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Definition
| CFTC (Commodity Futures Trading Commission) – a federal regulatory agency with exclusive jurisdiction over all futures trading. The Commodity Futures Trading Commission (CFTC) is authorized to regulate the futures exchanges, futures commission merchants (FCM) and their agents, traders and floor brokers. The agency was formed by the Commodity Exchange Act of 1974. |
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Term
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Definition
| Clearinghouse – an agency associated with an exchange which guarantees all trades, therefore assuring contract delivery and financial settlement. The clearinghouse becomes the purchaser for every seller and the seller for every purchaser. |
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Term
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Definition
| Clearing Associate – a clearinghouse associate is liable for executing customer trades. Clearing associate also monitors the financial capability of their customers by requiring sufficient margins and position reports. |
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Term
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Definition
| Commission – the fee which clearinghouses charge their customers to purchase and sell futures. The fee that brokers charge their customers is also known as a commission. |
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Term
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Definition
| Commodity – a good or item of trade or commerce. Goods tradeable on an exchange, for example: gold, pig or corn, as distinguished from instruments or other intangibles like stock indexes or T-bills. |
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Term
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Definition
| Commodity Product Spread – the simultaneous purchase (sale) of a commodity and the sale (or purchase) of the products of that commodity; e.g., purchasing soybeans and selling soybean oil and meal. This is known as a “crush spread”. Another example would be, the “crack spread”, where the crude oil is bought and gasoline and heating oil are sold. |
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Term
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Definition
| Contract – a legally enforceable agreement among two or more parties for performing or refraining from performing some specified act; for example: delivering 5,000 bushels of corn at a specified time, grade, price and place. |
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Term
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Definition
| Contrarian Theory – a theory suggesting that the general consensus about trends is incorrect. The contrarian would take the opposite position from the majority opinion to capitalize on overbought or oversold situations. |
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Term
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Definition
| Conversion - for an investor who is long the physical and short synthetic futures, the sale of a cash position and investment of part of the proceeds in the margin for a long futures position. The remaining money would be placed in an interest bearing instrument. This practice permits the dealer/investor to receive high rates of interest and take delivery of the commodity if needed. |
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Term
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Definition
| Conversion factor – a figure published by the Chicago Board of Trade (CBOT) used to adjust a T-bond hedge for the difference in maturity among the T-bond contract specifications and the T-bonds being hedged. |
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Term
| CPO (Commodity Pool Operator) – |
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Definition
| CPO (Commodity Pool Operator) – a person or firm who accepts securities, funds or property for trading commodity futures contracts and combines client funds into pools. The bigger amount or pool, the more staying power the Commodity Pool Operator (CPO) and her customers have. They may be able to last through a drop in prices until the position becomes profitable. Commodity Pool Operators (CPOs) should register with the Commodity Futures Trading Commission (CFTC) and are closely regulated. |
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Term
| CTA (Commodity Trading Advisor) |
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Definition
| CTA (Commodity Trading Advisor) – an individual or company who analyzes the markets and recommends trades. Commodity Trading Advisors (CTAs) are required to be registered with the Commodity Futures Trading Commission (CFTC) and to belong to the National Futures Association (NFA). |
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Term
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Definition
| Cover – used to show the repurchase of previously sold contracts as, she covered her short position. Short covering is synonymous with liquidating a short position or evening up a short position. |
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Term
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Definition
| Covered position – a transaction which has been offset with an opposite and equal transaction; e.g., if a gold futures contract has been bought and later a call option for the same commodity amount and delivery date was sold, the trader’s option position is “covered”. She holds the futures contract deliverable on the option if it is exercised. Also used to show the repurchase of previously sold contracts as, she covered her short position. |
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Term
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Definition
| Crack spread – a type of commodity product spread involving the purchase of crude oil futures and the sale of gasoline and heating oil futures. |
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Term
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Definition
| a type of commodity product spread which involves the purchase of soybean futures and the simultaneous sale of soybean meal and soybean oil futures. |
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Term
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Definition
| commodity traders (typically those active on the trading floor) who establish a futures position and offset that position on the same day. |
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Term
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Definition
| Delivery – the transportation of a physical commodity to a specified destination in fulfillment of a futures contract. |
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Term
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Definition
| Delta - the correlation factor among a futures price fluctuation and the change in premium for the option on that futures contract. Delta changes from moment to moment as the option premium changes. |
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Term
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Definition
| Discount – a) quality differences among those standards set in some futures contracts and the quality of the delivered goods. If inferior goods are tendered for delivery, they are graded below the standard and a lesser amount is paid for them. They are sold at a discount; b) price differences among futures of different delivery months; c) for short term financial instruments, “discount” may be used to describe the way interest is pay. Short term instruments are bought at a price below the face value “discount”. At maturity, the full face value is paid to the buyer. The interest is imputed, rather than being paid as coupon interest during the term of the instrument; e.g., if a T-bill is bought for $974,150.00, the price is quoted at 89.66 or a discount of 10.34% (100.00 – 89.66 = 10.34). At maturity, the holder receives $1,000,000.00. |
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Term
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Definition
| Discretionary accounts – an arrangement in which an account holder gives authority of attorney to another individual; usually her broker, to make decisions to purchase or sell without notifying the owner of the account. Discretionary accounts often are called “controlled” or “managed” accounts. |
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Term
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Definition
| Eurodollar Time Deposits – the United States dollar on deposit outside the United States, either with a foreign bank or a subsidiary of a United States bank. The interest paid for these dollar deposits usually are higher than that for funds deposited in United States banks because the foreign banks are riskier – they will not be supported or nationalized by the United States government upon default. |
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Term
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Definition
| Even up – to close out, liquidate or cover an open position. |
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Term
| FCM (Futures Commission Merchant) |
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Definition
| futures broker who keeps client accounts, and order trades for these clients on their behalf. |
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Term
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Definition
| a board of Directors comprised of seven members which directs the federal banking system, is appointed by the President of the United States and confirmed by the Senate. The functions of the board consist of formulating and executing monetary policy, overseeing Federal Reserve Banks, and regulating and supervising member banks. Monetary policy is implemented through the purchase or sale of securities and by raising or lowering the discount rate – the interest rate at which banks borrow from the Federal Reserve |
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Term
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Definition
| include interest rate futures, index futures and currency futures. The financial futures market currently is the fastest growing of all the futures markets. |
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Term
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Definition
| contract entered into by two parties who agree to the futures purchase or sale of a specified commodity. This differs from a futures contract in that the participants in a forward contract are contracting directly with each other, rather than through a clearing corporation. The terms of a forward contract are negotiated by the purchaser and seller, while exchanges set the terms of futures contracts |
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Term
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Definition
| the study of specific factors; for example: wars, weather, discoveries and changes in the government policy, which influence supply and demand and, as a result, prices in the marketplace |
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Term
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Definition
| a standardized agreement to buy or sell a set quantity and quality of a commodity at a specific place and time at a price determined on the exchange floor. The terms of the standardized agreement are set by the exchanges. |
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Term
| GNMA (Government National Mortgage Association) |
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Definition
| government organization which issues guaranteed certificates by FHA and VA mortgages. |
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Term
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Definition
| transferring the danger of loss due to adverse price movement through the purchase and sale of contracts in the futures markets. The position in the futures market is opposite to the position held in the cash market; that is, a long cash position is hedged with a short futures position (short hedge) and vice versa (long hedge). |
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Term
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Definition
| Interest rate futures – futures contracts traded on short term and long term financial instruments. Treasury debt (T-bonds, T-notes and T-bills) and other interest rate sensitive instruments; for example: London Interbank Offered Rate (LIBOR), FIBOR, Paris Interbank Offered rate (PIBOR), 30-day Fed Funds, Eurodollar time deposit, etc. |
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Term
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Definition
| Inter-market – a spread in the same commodity, but on different markets. An example of an inter-market spread would be purchasing a wheat contract on the CBOT (Chicago Board of Trade) and simultaneously selling a wheat contract on the KCBT (Kansas City Board of Trade). |
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Term
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Definition
| Intra-market – a spread within a market. An example of an intra-market spread is purchasing a corn contract in the nearby month and selling a corn contract on the same exchange in a distant month. |
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Term
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Definition
| Intrinsic value – the value of an option measured by the difference between the strike price and the market price of the underlying futures contract when the option is “in-the-money”. A COMEX 350 gold futures call would have an intrinsic value of $10.00 if the underlying gold futures contract is at $360.00/oz. |
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Term
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Definition
| Inverted market – a futures market in which near-month contracts are selling at prices that are higher than those for deferred months. An inverted market is characteristic of a short term supply shortage. The notable exceptions are interest rate futures, which are inverted when the discount contracts are at a premium to near-month contracts. |
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Term
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Definition
| – demand exhibits a direct relationship to price. If all other factors stay constant, an increase in demand leads to an increased price, while a drop in demand leads to a dropped price. |
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Term
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Definition
| supply exhibits an inverse relationship to price. If all other factors hold constant, an increase in supply causes a drop in price, while a drop in supply causes a dropped price. |
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Term
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Definition
| Limit orders – a client sets a limit on price or time of execution of a trade or both; such as, a “purchase limit” order is placed below market price. A “sell limit” order is placed above the market price. A sell limit is executed only at the limit price or higher (better), while the purchase limit is executed at the limit price or lower (better). |
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Term
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Definition
| Limited risk spread – a bull spread in a market where the price difference between the two contract months covers the full carrying charges. The risk is limited because the probability of the distant month price moving of a premium greater than full carrying charges is minimal. |
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Term
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Definition
| Liquidate – refers to closing an open futures position. For an open long, this would be selling the contract. For a short position, it would be purchasing the contract back (short covering or covering her short). |
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Term
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Definition
| Liquidity – refers to a market which permits efficient or quick entry or exit at a price close to the last traded price. This ability to liquidate or establish a position quickly is due to a large number of traders willing to purchase and sell. The market is to flow like liquid or have liquidity. |
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Term
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Definition
| Long – the purchase of a futures contract, generally in anticipation of a price increase. Also, going net long. Long also is used to describe an individual who has purchased a futures contract or the physical cash commodity. A trader holding a long position hopes to gain from a price increase. |
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Term
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Definition
| Long-the-basis – an individual who owns the physical commodity and hedges her position with a short position is said to be long-the-basis. Her profits from the basis becoming more positive (stronger); for example, if a farmer sold a February soybean futures contract at $6.00 with the cash market at $5.80, the basis is - .20. If she repurchased the February contract later at $5.50 when the cash price was $5.40, the basis would then be .10. The long-the-basis hedger gained from the .10 increase in basis. |
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Term
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Definition
| Maintenance margin - the minimum level at which the equity in a futures account should be maintained. If the equity in an account drops below this level, a margin call will be issued and funds should be added to bring the account back to the initial margin level. The maintenance margin level usually is 75% of the initial margin requirement. |
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Term
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Definition
| Margin – an amount of money deposited by futures contracts purchasers and sells as “earnest money “or “performance bond”, insuring the performance of the terms of the contract. Margin is also required when writing an option on a futures contract. |
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Term
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Definition
| Margin call – a call from the clearinghouse to a clearing associate or from a broker to a client, to add funds to their margin account to cover an adverse price movement. The added margin assures the brokerage firm and the clearinghouse that the client can buy or deliver the whole contract, if need be. |
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Term
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Definition
| Market order – an order to purchase or sell futures contracts as soon as possible at the best available price. Time is of primary importance, not price. Whatever the market price, the order must be executed now. |
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Term
| Market-value weighted index |
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Definition
| Market-value weighted index – stock index in which each stock is weighted by market value. A change in the price of any stock will influence the index in proportion to the stock’s respective market value. The value of each stock is decided by multiplying the number of shares outstanding by the stock’s market price per share; thus, a high-priced stock with a big number of shares outstanding has more impact than a low-priced stock with only a few shares outstanding. The Standard & Poors 500 is a value weighted index. |
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Term
| NFA (National Futures Association) |
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Definition
| NFA (National Futures Association) – is an organized group under the Commodity Futures Trading Commission (CFTC) that requires membership for Futures Commission Merchants (FCMs), their associates and agents, Commodity Pool Operators (CPOs) and Commodity Trading Advisors (CTAs). This is a self-regulatory group similar to the National Association of Dealers, Inc. |
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Term
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Definition
| removing the obligation to make or take delivery of a commodity by liquidating a purchase or covering a sale futures. This is affected by taking an equal and opposite position: either a sale to offset a previous purchase or a purchase to offset a previous sale in the same commodity, with the same delivery date. If an investor purchased a September gold contract on the COMEX, she would offset this obligation by selling a September contract on COMEX. To offset an option, the same option should be purchased or sold. |
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Term
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Definition
| an account carried by one FCM (Futures Commission Merchant) with another. The transactions of two or more individual accounts are combined in this kind of account. The identities of the individual account holder are not disclosed to the second Futures Commission Merchant (FCM). A brokerage firm may have an omnibus account consisting of all its clients with its clearing firm. |
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Term
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Definition
| Open outcry – oral bids and offers made in the trading pits or rings. This method assures the purchaser and the seller that they will receive the best price available. It is not similar to the over-the-counter market for securities where a market maker decides the price. |
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Term
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Definition
| Opening range – a range of prices recorded at the official “opening” of a trading day. |
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Term
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Definition
| Opportunity cost – the price paid out for not investing in a different investment. It is the income lost from missed opportunities. Had the money not been invested in land, earning 5%, it could have been invested in T-bills, earning 10%. The 5% difference is an opportunity cost. |
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Term
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Definition
| Option – a unilateral contract giving the purchase the right to purchase or sell a commodity at a specified price within a certain time period. It is unilateral because only one party has the right to demand performance on the contract. |
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Term
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Definition
| Pit – an area on the trading floor of an exchange where futures trading take place. This area is described as a “pit” because it is octagonal with steps descending into the center. Traders stand on the various steps, which designate the contract month they are trading. When viewed from above, the trading area looks like a pit. |
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Term
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Definition
| Pit broker – an individual on the exchange floor who trades futures contracts in the pits. |
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Term
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Definition
| the group of investments held by an owner. |
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Term
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Definition
| Position-traders – traders who establish a position and hold it for relatively long periods. |
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Term
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Definition
| Premium – a) the extra payment required for higher-than-required grades of a commodity delivered on a futures contract; b) in reference to price relationships, the higher-priced commodity or contract is said to be at a premium over the lower-priced commodity or contract; c) the price to buy an option. This is also the money received when an option is sold. |
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Term
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Definition
| Price weighted index – a stock index weighted by adding the price of 1 share of each stock indicated in the index, and dividing this sum by a constant divisor. |
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Term
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Definition
Promotional material consists of:
a.) Any text of a standardized oral presentation, or any communication for publication in any magazine, newspaper or similar medium or for broadcast over radio, TV or other electronic medium, which is disseminated or directed to the public concerning a futures agreement, account or transaction;
b.) Any standardized form of letter, report, memorandum, circular or publication which is disseminated or directed to the public; and
c.) Any other written material disseminated or directed to the public for the purpose of soliciting a futures agreement, account or transaction.
Reprinted with permission from the NFA (National Futures Association). Copyright 2003. |
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Term
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Definition
| Put – an option account contract which reserves the right to sell something at a specified price within a certain period of time. A put is bought in expectation of lower prices. If prices are expected to increase, a put may be sold. |
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Term
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Definition
| Pyramiding – buying extra contracts with the profits earned on open positions. |
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Term
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Definition
| Ratio writing – when an investor writes more than one option to hedge an underlying futures contract. These options are typically written for different delivery months. Ratio writing expands the profit potential of the investor’s option position. For example, an investor would be ratio writing if she is long one September gold contract and she sells (writes) 2 gold calls, one for March delivery, and the other for September. |
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Term
| RCR (Registered Commodity Representative) – |
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Definition
| RCR (Registered Commodity Representative) – an individual registered with the exchanges and the Commodity Futures Trading Commission (CFTC) who is liable for soliciting business, “knowing” his/her clients, collecting margins, submitting orders, and recommending and executing trades for clients. An RCR (Registered Commodity Representative) is sometimes called an “account executive” or “broker”. |
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Term
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Definition
| Reversal – for an individual short the physical and long synthetic futures, borrowing to buy the physical and shorting futures. This takes advantage of low interest rates and permits her to make delivery if necessary. |
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Term
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Definition
| Scalper – a speculator active on the floor of an exchange who purchases or sells often to take advantage of small price fluctuations. This kind of trading gives a great deal of liquidity to the market. Scalpers purchase and sell often; therefore, they make it possible for others to enter or exit the market fast. |
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Term
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Definition
| Short – the sale of a futures contract. This sale is a legally enforceable agreement to make delivery of a specific quantity and grade of a particular commodity during a specified delivery period. This also means it is used to describe someone who has sold a contract short. |
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Term
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Definition
| Short-the-basis – when an individual or firm needs to purchase a commodity in the future, they can protect themselves against price increases by making a substitute purchase in the futures market. The danger this individual now faces is the danger of a change in basis (cash price minus futures price). This hedger is said to be short-the-basis because she will profit if the basis becomes more negative (weaker); for example, of a hedger purchases a corn futures contract at 325 when cash corn is 312, the basis is -.13. If this hedge is lifted with futures at 320 and cash at 300, the basis is -.20, and the hedger has profited by the $0.07 drop in basis. |
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Term
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Definition
| Speculation – an attempt to gain from commodity price changes through the purchase and sale of commodity futures. In this process, the speculator assumes the danger that the hedger is transferring and provides liquidating in the market. |
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Term
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Definition
| Spot – the market in which the commodities are available for immediate delivery. It also refers to the cash market price of a specific commodity. |
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Term
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Definition
| Spreading – the purchase of one futures contract and the sale of another is an attempt to gain from the change in price difference between the two contracts. Inter-commodity, inter-delivery, inter-market and commodity-products are some examples of spreads. |
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Term
| Statement of Extra Information – |
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Definition
a) If the commodity pool operator (CPO) prepares for a Statement of Extra Information, the cover page should include the following:
i. The name of the commodity pool;
ii. The date of the most recent Disclosure Document for the pool;
iii. The date of the Statement of Extra Information; and
iv. A brief statement that the Statement of Extra Information is the second part of a two-part document and that it should be read in conjunction with the pool’s Disclosure Document, with the instructions on how to obtain a free copy of the Disclosure Document.
b) The cover page should be immediately followed by a table of contents.
c) The Statement of Extra Information may also contain:
i. Statements that expand on or explain the disclosures in the Disclosure Document, provided that the statements are not misleading or inconsistent with applicable rules, statutes or regulations;
ii. Any other information about the commodity pool; its investments; its Commodity Trading Advisor (CTA), Commodity Pool Operator (CPO) service providers, and their participants and employees; the commodity futures markets; that affect the value of the pool’s investments,. Provided that the information is not misleading or otherwise inconsistent with applicable rules, statutes or regulations; and
iii. Disclosures, not included in the Disclosure Document, that are required by the SEC (Securities and Exchange Commission) or state securities administrators.
Reprinted and permission from NFA (National Futures Association). Copyright 2003. |
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Term
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Definition
| Stock index futures – back on stock market indexes, including Value Line, NYSE Composite, Standard and Poors 500, the DJIA (Dow Jones Industrial Average) and the Nikkei 225 Index, these instruments are used by investors concerned with price changes in a large number of stocks or with major long-term trends in the stock market indexes. |
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Term
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Definition
| Stop orders – an order which becomes a market order once a certain price level is reached. These orders are often placed with the purpose of limiting losses. They also are used to initiate positions. Buy stop orders are at a price above the current market price. Sell stop orders are placed below the market price; for instance, if the market price for January corn is 320, a buy stop order could be placed at 320 ¼ or higher, and a sell stop could be placed at 319 ¼ or lower. A buy stop order is activated by a bid or trade at or above the stop price. A sell stop is triggered by a trade or offer at or below the stop price. |
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Term
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Definition
| Strike price – the specified price at which an option contract may be exercised. If the purchaser of the option exercise the futures contract positions will be entered at the strike price. |
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Term
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Definition
| Synthetic position – a hedging strategy combining futures and futures options for price protection and increased profit potential; for instance, by purchasing a put option and selling a call option, a trader can construct a position that is similar to a short futures position. This position is known as a “synthetic short futures position”, and will show a profit if the futures prices drop and receive margin calls if prices increase. Synthetic positions are a form of arbitrage. |
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Term
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Definition
| Technical analysis – technical analysis uses charts to examine changes in volume of trading, price patterns, open interest and rates of change to predict a profit from trends. Someone who follows technical rules believes that futures market prices will anticipate any changes in fundamentals. |
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Term
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Definition
| Time value – the premium on an –out-of-the-money option reflecting the probability that an option will move into the money prior to expiration constitutes the time value of the option. There also may be some time value in the premium of an in-the-money option, which reflects the probability of the option moving further into the money. |
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Term
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Definition
| T-bills (Treasury bills) – are short term United States government debt instruments of three, six or twelve month maturities. T-bills are a fixed income asset issued at a discount. The face value is paid at maturity. |
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Term
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Definition
| T-bonds (Treasury bonds) – are long term United States government debt instruments with maturities of more than 7 years. These are fixed-income assets that pay interest semi-annually. |
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Term
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Definition
| Variable limits – most exchanges set limits on the maximum daily price movement of some of the futures contracts traded on their floor. They also retain the right to expand these limits of the price moves up or down the limit in one direction for two or three trading days in a row. If the limits automatically change after repeated limit moves, they are known as “variable limits”. |
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Term
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Definition
| Volatile – a market which often is subject to wide price fluctuations is said to be “volatile”. This volatility is often due to a lack of liquidity. |
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Term
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Definition
| Wash sales – are an illegal process in which simultaneous purchases and sales are made in the same commodity futures contract, on the same exchange, and in the same month. No actual position is taken, though it appears that trades have been made. |
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Term
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Definition
| Yield – is the protection of piece of land; for example, her land yield 100 bushels per acre. b) the return provided by an investment; e.g. if the return on an investment was 10%, the investment yielded 10%. |
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Term
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Definition
| Necessary Evil to get to the 8 figures in your twenties. That is disrespectful. |
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