FUTURES GLOSSARIES:

THIS GLOSSARY WAS OBTAINED FROM THE CSCE.  PLEASE VISIT THEM AT WWW.CSCE.COM

This glossary is designed as an aid in understanding terms that are widely used in the futures and options industry and does not constitute a legal opinion or interpretaion on any of the listed items.

A - B - C - D - E - F - H - I - L - M - N - O - P - R - S - T - V - W

A

Actuals - The physical or cash commodity, as distinguished from a futures contract.

American option - An option that can be exercised on any business day before it expires.

Arbitrage - Simultaneous purchase of cash commodities or futures in one market against the sale of cash commodities or futures in a different market, to profit from a discrepancy in prices. In some definitions, arbitrage refers only to riskless transactions in which the entire investment is made with borrowed funds. Assignment - The process by which the seller of an option is notified of  the buyer's intention to exercise, thereby requiring the seller to take either an opposing short position, in the case of a call, or an opposing long position, in case of a put.

Associated person (AP) - Category of persons, associated with firms or other entities, who must be registered under the Commodity Exchange Act.

At-the-money - An option whose strike price equals the current price of the underlying commodity, security, currency, index or futures contract.

 B

Backwardation - Market situation in which futures prices are progressively lower in the distant delivery months. The opposite of contango, or carrying-charge, market.

Basis - The difference between the spot or cash price of a commodity, security, currency or index and the futures price of the same or related underlying item. Basis is usually computed to the nearby future and may represent different time periods, product forms, grades and locations depending upon the cash and futures prices used.

Basis grade - The grade of a commodity used as the standard of the futures contract.

Bear spread - Short the nearby future and long the deferred, in anticipation of a decline in the general level of prices, with the nearby future expected to decline more than the deferred contract.

Bid - An offer to buy at a stated price. Broker - A person who is paid a fee or commission for executing orders. In futures trading, the term may refer to: (1) a floor broker, i.e., an exchange member who executes orders on the trading floor of an exchange; (2) an account executive or associated person who deals with customers for a futures commission merchant or introducing broker; and (3) a futures commission merchant.

Bull - One who expects a rise in prices. The opposite of a "bear".

Bull spread - Long the nearby future and short the deferred in anticipation of an increase in the general level of prices, with the nearby future expected to increase more than the deferred contract.

Buying hedge (or Long hedge) - Hedging transaction in which futures contracts are bought to protect a short cash market position against possible increases in the prices of commodities, securities, indexes or currencies.

 C

Call option - An option that gives the buyer (holder) the right, but not the obligation, to purchase a specific asset or obtain a long futures position at a fixed price within a specified period of time.

Carrying charges - Cost to inventory a physical commodity or financial instrument over a period of time. Includes insurance, storage and interest on the invested funds as well as other incidental costs.

Cash commodity - The physical or actual commodity as distinguished from the futures contract. Sometimes called the spot commodity or actuals.

Cash price - The price for actual or spot commodities available via customary marketing channels.

Certificated or Certified stocks - Stocks of a commodity that have been inspected and found to be of a quality deliverable against a futures contract, stored at the delivery points designated as acceptable for delivery by the futures exchange. CFTC - See Commodity Futures Trading Commission.

Charting - The use of graphs and charts in the technical analysis of futures markets to plot trends of price movements, average movements of prices, volume and open interest.

Clearing - The procedure through which the clearinghouse becomes the buyer to each seller of a futures contract and the seller to each buyer and assumes responsibility for the financial integrity of each open contract.

Clearing member - A member of a clearinghouse through whom all trades must be settled.

Clearinghouse - An adjunct to a futures exchange through which transactions executed on the floor of the exchange are matched, settled and guaranteed. Charged with assuring the adequate financial protection of trading through collection and payment of margin and the proper conduct of the exchange's delivery procedures.

Commission - (1) The charge made by a futures commission merchant or introducing broker for handling futures and options orders; (2) the Commodity Futures Trading Commission.

Commodity Futures Trading Commission (CFTC) - The federal regulatory agency established in 1975 to administer the Commodity Exchange Act.

Commodity pool - An enterprise in which funds contributed by a number of persons are combined for the purpose of trading futures or options on futures.

Commodity Pool Operator (CPO) - An individual or firm, required to be registered under the Commodity Exchange Act, who solicits funds, securities or property for a commodity pool.

Commodity Trading Advisor (CTA) - An individual or firm who, for pay, trades accounts for individual clients or for commodity pools and/or who provides analysis, reports or advice concerning futures and options trading.

Contango - Market situation in which prices are progressively higher in the succeeding delivery months than in the nearest delivery month. Also termed carrying charge; opposite of backwardation.

Cover - (1) To offset an existing futures position; (2) to have in hand the physical commodity or other asset underlying a futures contract when a short futures position is taken; or (3) to acquire the commodity to be delivered on a short futures position.

Covered call writing - To grant, or write, a call option while holding or having a long position in the underlying security, commodity, currency, index or futures contract.

Cross-hedge - Hedging a cash market risk in a futures or options contract for a different but price-related commodity, security, currency or index.

 D

Day-trading - Establishing a futures or options position and offsetting it the same day.

Deferred futures - The futures delivery months, of those currently trading, that expire farthest in the future; also called forward months.

Delivery month - The specified month within which a futures contract matures and can be settled by delivery.

Delta - The amount of change of an option's price or theoretical value for a unit change in the price of the underlying security, commodity, currency, index or futures contract.

Discount - (1) The amount a price would be reduced to purchase a commodity of lesser grade; (2) price differences between futures of different delivery months; (3) cash prices below the futures price.

Discretionary account - An arrangement by which the holder of a futures or futures options account gives written power of attorney to someone else, often the broker, to buy and sell futures and/or futures options without the holder's prior approval.

Dual trader - An exchange member who trades for his or her own account as well as executes customer orders.

 E

EFP - An exchange of futures for physicals, which is a transaction in which one party buys the physical commodity and simultaneously sells futures and the other party does the opposite-sells the physical commodity and simultaneously obtains a long futures position.

Equity - The residual dollar value of a futures or options account if it were liquidated at current prices. European option - An option that can be exercised only at the options expiration date. European Option - An option which may be exercised only at expiration.

Exercise - To take advantage of the right conferred on an option's buyer to buy or sell the item underlying the option at the option's strike (exercise) price.

Exercise price - The price at which the buyer of a call can purchase the underlying commodity, security, index, currency or futures contract during the life of the option or the price at which the buyer of a put can sell the underlying commodity, security, index, currency or futures contract during the life of the option. Also termed strike price.

 F

Floor broker - A person, registered with the National Futures Association, who buys and sells futures contracts for others on the exchange trading floor.

Floor trader - An exchange member, sometimes called a "local," who executes trades for his or her own account in the futures pit or ring. Floor traders must be registered with the National Futures Association.

Forward market - Non-exchange trading of commodities or other assets to be delivered at a future date. Contracts for forward delivery are "tailored", i.e., delivery time, location and amount are determined between each seller and buyer and generally involve marketing, merchandising and delivery.

Futures commission merchant (FCM) - Individuals, associations, partnerships, corporations and trusts that solicit or accept orders for the purchase or sale of futures and options on futures and that accept payment from or extend credit to those whose orders are accepted. FCMs must be registered with the National Futures Association. Give-up - (1) A trade that is directed to a floor broker by an exchange member FCM (executing firm) and, after the trade is executed, it is given to another firm to clear (clearing firm); (2) a trade in which a customer contacts a floor broker directly, and after execution of the customer's order the floor broker gives up the name of the clearing member who will clear the trade.

 H

Hedge ratio - The number of futures contracts needed to hedge a cash market position.

Hedging - Taking a position in a futures market opposite to a position held in the cash market to minimize the risk of an adverse price change; a purchase or sale of a futures contract as a temporary substitute for a cash transaction that will occur later.

 I

In-the-money - A call option with a strike price lower, or a put option with a strike price higher, than the current market price of the underlying asset or futures contract.

Initial margin - Customers' funds put up as security to guarantee contract fulfillment at the time a futures or options position is established. Intrinsic value - For a call option, the excess of the current market price of the asset or futures contract underlying the option over the strike price of the option; for a put option, the excess of the strike price over the current market price of the asset or futures contract underlying the option.

Introducing broker - Any person, other than someone registered as an associated person of a futures commission merchant, who solicits or accepts futures and related options orders but does not accept money from customers.

Inverted market - A futures market in which the nearer months are selling at prices higher than the more distant month; characteristic of markets in which supplies are currently in shortage or the yield on the underlying asset exceeds the cost of carrying that asset. Also termed backwardation.

 L

Limit move - A price that has advanced or declined the permissible amount during one trading session, as fixed by the rules of an exchange.

Liquidation - (1) Offsetting or closing out a futures position; (2) a market in which open interest is declining.

Long - (1) One who has bought a futures or options contract to establish a market position; (2) a market position that obligates the holder to take delivery; (3) one who owns an inventory of commodities or securities.

 M

Margin (futures) - The amount of money or collateral deposited by a client with a broker, or by a clearing member with the clearinghouse, as required by the exchange and/or clearinghouse for open futures positions. Initial margin is the total amount of margin per contract required by the broker when a futures position is opened by a customer; maintenance margin is the minimum amount of money per contract that must be maintained on deposit at all times the position is open.

Margin call - (1) A request from a brokerage firm to a customer to bring margin deposits back to initial levels, normally because of losses resulting from an adverse price move; (2) a request by a clearing house to a clearing member to make payments to or increase deposits at the clearinghouse.

Minimum price fluctuation - Smallest price change possible in a futures or options contract. Also called the tick value.

 N

Nearby futures - The futures contract(s) closest to expiration.

 O

Offer - An indication of willingness to sell at a given price; opposite of bid.

Offset - Liquidating a purchase of futures or options through the sale of an equal number of contracts of the same delivery month, or liquidating a sale of futures or options through the purchase of an equal number of contracts of the same delivery month.

Omnibus account - An account carried by one futures commission merchant with another futures commission merchant in which the transactions of two or more accounts are combined and carried in the name of the originating FCM rather than designated separately.

Open interest - All futures or options contracts that have been entered into and not yet liquidated by an offsetting transaction or by delivery.

Option - A contract that gives the buyer the right but not the obligation to buy or sell a futures contract or a specified quantity of a commodity, security, currency or index at a specific price within a specified period of time, regardless of the current market price of the underlying item.

Original margin - The deposit the clearinghouse requires of clearing members when futures contracts are presented for clearance; parallel to the initial margin required of customers by exchanges and collected by FCMs when futures positions are originated.

Out-of-the-money - A call option with a strike price higher or a put option with a strike price lower than the current market price of the underlying commodity, security, currency, index or futures contract.

 P

P&S (Purchase-and-sale) statement - A statement sent by a brokerage firm to a customer when a futures or options position is offset or extinguished by delivery. A P&S statement typically shows the number of contracts involved, the prices at which and dates on which the contracts were bought and sold, the gross profit or loss, the commission charges, the net profit or loss on the transactions and the account balance.

Pit - A specially constructed arena on the trading floor where futures and options trading is conducted.

Position limit - The maximum position, either net long or net short, in a futures market, an options market or in a futures and its related options market combined, that may be held or controlled by one person as prescribed by an exchange or the CFTC. Such limits can be set for individual expiration months and for all listed expiration months combined. Because hedgers often are exempt from these limits, they often are termed "speculative limits".

Position trader - a futures trader who buys or sells contracts and holds them for an extended period of time - as distinguished from a day trader, who normally initiates and offsets futures positions within a single trading session and ends the day "flat".

Premium - (1) The amount a price would be increased to purchase a better quality commodity; (2) a futures delivery month selling at a higher price than another; (3) cash prices that are above the futures; (4) the money an option buyer pays to an option writer for granting an option.

Put - An option to sell a specified amount of a commodity, security, currency, index or futures contract at an agreed-upon price within a specified period of time.

 R

Rollover - (1) A trading procedure involving the shift of one delivery month of a spread into another month while holding the other delivery month. The shift can take place in either the long or short month. (2) Lifting a futures position that is not part of a spread and simultaneously re-establishing it in a deferred delivery month.

Round turn - A completed transaction involving both a purchase and a sale.

 S

Scalper - A speculator on the trading floor of an exchange who buys and sells frequently, holding positions for only a short period of time during a trading session. In liquid markets, scalpers stand ready to buy at the minimum price change (tick) below the last transaction price and to sell at a tick above.

Selling hedge (or Short hedge) - Selling futures contracts against a long cash market position to protect against a decrease in the price of a commodity, security, currency or index.

Settlement price - The price at which the clearinghouse each day settles all accounts between clearing members for each open position in each contract month of each futures and options contract. Settlement prices are used to determine both margin calls and invoice prices for deliveries.

Short - (1) The selling side of an open futures contract; (2) a trader whose net position in the futures market shows an excess of open sales over open purchases; (3) selling (granting) an options contract.

Short-covering - Buying to offset an existing short position.

Spot - (1) Market for immediate delivery and payment of the product. (2) Nearest delivery month of a futures contract.

Spot price (or Cash price) - The price at which a physical, actual or spot commodity is selling at a given time and place.

Spread - The purchase of one futures or options contract against the sale of another futures or options contract on the same or related commodity, security, currency or index.

 T

Tick - Minimum price fluctuation of a futures or options contract.

Time value - The excess, if any, of an option's premium over its intrinsic value.

 V

Variation margin - Settlement via the clearinghouse of daily or intraday gains and losses between clearing member firms.

Volatility - A measure of variability, usually of prices, and a major factor influencing the price of an option. The standard deviation of a price series is commonly used to measure price volatility.

Volume - The number of contracts (either the long or the short side of the market) traded during a specified period of time.

 W

Writer - The seller or grantor of an option.

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