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Arbitrage

Simultaneous purchase and sale of two different contracts (or a combination of cash and futures) to take advantage of perceived mis-pricing. In a pure arbitrage, mis-pricing is locked in and a risk-free profit made through trades.

At-the-market

An order to buy or sell at the best price possible at the time an order reaches the trading pit.

At-the-money

In options, when the strike price equals the price of the underlying futures.

Basis

The difference between the price of a futures contract and the underlying commodity’s spot (or cash) price.

Bearish

A market trending downward, or a person who expects prices to go lower.

Bid

A bid, subject to immediate acceptance, made on the floor of exchange to buy a definite number of futures contracts at a specified price.

Breaking

A quick decline In price.

Break Out

A price break (up or down) of the current trading range.

Bullish

A market trending upward; on a person who expects prices to go higher.

Buy on close

To buy at the end of the trading session at a price within the closing range.

Buy on opening

To buy at the beginning of a trading session at a price within the opening range.

Call

An option that gives the buyer the right to a long position in the underlying futures at a specific price; the call writer (seller) may be assigned a short position in the underlying futures if the buyer exercises the call.

Cash market

Markets where trading is taking place for spot (immediate or near immediate) delivery as opposed to future delivery.

CFTC

Commodity Futures Trading Commission

Close

The period at the end of the trading session officially designated by the exchange during which all transactions are considered made “at the close.”

Closing price: (or range)

The price (or price range) recorded during the period designated by the exchange as the official close.

Cover

The cancellation of a short position in any futures contract by the purchase of an equal quantity of the same futures contract (see liquidation).

Day orders

Orders at a limited price which are understood to be good for the day unless expressly designated as an open order or “good-till-canceled” order.

Delivery month

Specified month within which delivery may be made under the terms of a futures contract.

Financial futures

Futures contracts based on interest-rate instruments (T-bonds. T-bills, etc.), foreign currencies and indexes.

Fundamental analysis

An approach to market forecasting that emphasizes the analysis of factors affecting supply and demand (opposite of technical analysis).

Futures contract

A term used to designate any or all contracts covering the sale of commodities (including financial instruments and cash representing indexes) for future delivery made on an exchange and subject to its rules.

Hedge

A sale of futures contracts to offset the ownership or purchase of the underlying cash commodity in order to protect it against adverse price moves; or, conversely, a purchase of futures contracts to offset the sale of the underlying cash commodity, again for protection against adverse price moves.

In-the-money

In call options, when the strike price is below the price of the underlying futures. In put options, when the strike price is above the price of the underlying futures. In-the-money options are the most expensive options because the premium includes intrinsic value.

Index futures

Futures contracts based on indexes such as the S&P 500 or Value Line Index. These are cash settlement contracts.

Intrinsic value

For in-the-money call and put options, the difference between the strike price and the underlying futures price.

Limit

The maximum daily price change above or below the previous close in a specific futures market. Trading limits may be changed during periods of unusually high market activity.

Limit order

An order given to a broker by a customer which has some restrictions upon its execution. such as price or time.

Liquidation

A transaction made in reducing or closing out a long or short position, but more often used by the trade to mean a reduction or closing out of a long position.

Long

(1) The buying side of an open futures contract or futures option; (2) a trader whose net position in the futures or options market shows an excess of open purchases over open sales.

Margin

Cash or equivalent posted as guarantee of fulfillment of a futures contract (not a downpayment).

Margin call

Demand for additional funds or equivalent because of adverse price movements or some other contingency.

Mark-to-market

The practice of crediting or debiting a trader’s account based on the daily closing prices of the futures contracts he is long or short.

Market order

An order for immediate execution at the best available price.

Nearby

The futures contract closest to expiration.

Offer

An offer, indicating willingness to sell at a given price (opposite of bid).

On opening

A term used to specify execution of an order during the opening.

Open contracts

Contracts which have been bought or sold without the transaction having been completed by subsequent sale, repurchase, or actual delivery or receipt of commodity

Open interest

The number of “open contracts.” It refers to unliquidated purchases or sales and never to their combined total.

Open order

An order which is good until canceled.

Opening

The period at the beginning of the trading session officially designated by the exchange during which all transactions are considered made “at the opening.”

Opening price (or range)

The price (or price range) recorded during the period designated by the exchange as the official opening.

Out-of-the-money

Option calls with strike prices above the price of the underlying futures, and puts with strike prices below the price of the underlying futures.

Point

The minimum unit In which changes in futures prices may be expressed (minimum price fluctuation may be in multiples of points).

Position

An interest in the market in the form of open commitments.

Premium

The amount by which a given futures contract’s price or commodity’s quality exceeds that of another contract or commodity (opposite of discount). In options, the price of a call or put, which the buyer initially pays to the option writer (seller).

Price limit

The maximum fluctuation in price of a futures contract permitted during one trading session, as fixed by the rules of a contract market.

Put

In options. the buyer of a put has the right to acquire a short position in the underlying futures contract at the strike price until the option expires; the seller (writer) of the put obligates himself to take a long position in the futures at the strike price if the buyer exercises his put.

Range

The difference between the high and low price of the futures contract during a given period.

Reaction

The upward or downward tendency of a move after a news announcement

Round-turn

The execution for the same customer of a purchase transaction and a sales transaction which offset each other.

Round-turn commission

The cost to the customer for executing a futures contract which is charged only when the position is liquidated.

Scalping

For floor traders, the practice of trading in and out of contracts throughout the trading day in hopes of making a series of small profits.

Settlement price

The official daily closing price of a futures contract, set by the exchange for the purpose of settling margin accounts.

Short

(1) The selling of an option futures contract. (2) A trader whose net position in the futures market shows an excess of open sales over open purchases (see “long”).

Spot price

The price at which the spot or cash commodity is selling on the cash or spot market.

Spread

Usually refers to a simultaneous purchase of a contract and sale of another. Spreads can be transacted between contracts with the same underlying commodity but different months; the same month but different commodities; or the same month and com- modity but traded on different exchanges.

Strike price

In options, the price at which a futures position will be established if the buyer exercises (also called strike or exercise price).

Technical Analysis (charting)

In price forecasting, the use of charts and other devices to analyze price-change patterns and changes in volume and open interest to predict future market trends (opposite of fundamental analysis).

Time value

In options, the value of the premium is based on the amount of time left before the contract expires and the volatility of the underlying futures contract. Time value represents that portion of the premium in excess of intrinsic value. Time value diminishes as the expiration of the option draws near and/or if the underlying futures becomes less volatile.

Volume of tradig (or sales)

A simple addition of successive futures transactions (a transaction consists of a purchase and matching sale).

Writer

The seller of an option who collects the premium payment from the buyer.