ation of a position in one delivery month of a commodity andsimultaneous initiation of a similar position in another delivery month of the samecommodity. When used by hedgers, this tactic is referred to as “rolling forward”the hedge.Technical Analysis An approach to analysis of futures markets and anticipatedfuture trends of commodity prices. It examines the technical factors of market activity. Technicians normally examine patterns of price range, rates of change, andchanges in volume of trading and open interest. This data is often charted to showtrends and formations that serve as indicators of likely future price movements.Tender The act on the part of the seller of futures contracts of giving notice to theclearinghouse that he or she intends to deliver the physical commodity in satisfaction of the futures contract. The clearinghouse in turn passes along the noticeto oldest buyer of record in that delivery month of the commodity. See alsoRetender.Tick Refers to a change in price up or down. See also Point.Ticker Tape A continuous paper tape transmission of commodity or securityprices, volume, and other trading and market information which operates on private or lease wires by the exchanges. It is available to member firms and otherinterested parties on a subscription basis.Time Value Any amount by which an option premium exceeds the option’sintrinsic value.To-Arrive Contract A type of deferred shipment in which the price is based ondelivery at the destination point and the seller pays the freight in shipping it tothat point.Traders (1) People who trade for their own account. (2) Employees of dealers orinstitutions who trade for their employer’s account.Trading Range An established set of price boundaries with a high price and alow price that a market will spend a marked period of time within.Transferable Notice See Retender.Trendline A line drawn that connects either a series of highs or lows in a trend.The trendline can represent either support as in an uptrend line or resistance as ina downtrend line. Consolidations are marked by horizontal trendlines.Unauthorized Trading Purchase or sale of commodity futures or options for acustomer’s account without the customer’s permission.Underlying Futures Contract The specific futures contract that the option conveys the right to buy (in the case of a call) or sell (in the case of a put).Variable Limit A price system that allows for larger than normally allowed pricemovements under certain conditions. In periods of extreme volatility, someexchanges permit trading and price levels to exceed regular daily limits. At suchtimes, margins may be automatically increased.
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Variation Margin Call A mid-season call by the clearinghouse on a clearingmember requiring the deposit of additional funds to bring clearing margin moniesup to minimum levels in relation to changing prices and the clearing member’snet position.Volatility A measure of a commodity’s tendency to move up and down in price,based on its daily price history over a period of time.Volume of Trade The number of contracts traded during a specified period oftime.Warehouse Receipt Document guaranteeing the existence and availability of agiven quantity and quality of a commodity in storage; commonly used as theinstrument of transfer of ownership in both cash and futures transactions.Wirehouse See Futures Commission Merchant (FCM).Writer See Grantor.
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Accounts, 167, 173–174, 181,183–186Agreements, account, 183–185Agricultural commodities,contract specifications for,204–205Aluminum, 113American ArbitrationAssociation, 188Ancillary accounts, 167,173–174Arbitration, 188–189Arbitration agreement, 184Assessments, periodic, 162–163At-the-money options, 23Average daily price move, 62,63, 121Average daily volume, 169–170
Broker(s) (Cont.):resolving problems with,187–189selection of, 122–124Budget creation, 146–147Buffalo Trading Group, Inc.,Web site, 144, 147Bull markets, 59Bull spreads, 41Business plan, 141, 194–195Buyers:emotionality of, 30rights/obligations of, 21, 24risks of, 28and understanding ofoptions, 29–30Buying:of futures contracts, 8of options, 24–25
B
C
Backwardation, 135Bear markets, 59Bear spreads, 41Bear trap scale, 124Binders commodity sector (SeeCommodity sector binders)Black-Scholes formula, 36–37, 66Books, resource, 212–213Breakeven price, 37, 38Broker(s), 11–12electronic services, 128and futures markets, 11–12incomplete risk communication by, 29
Call options, 21, 23covered, 62long/short, 21shorting, 27Capital, preservation of, 54Carrying costs, 121, 126–127,134–136Carryover, 13Cattle, 108–110, 204–205CBOT (See Chicago Board ofTrade)Certainty, 64, 65, 199, 200CFTC (See Commodity FuturesTrading Commission)
A
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Channel lines, 87Charts, price (See Price charts)Chat room, scale trading, 210Chicago Board of Trade(CBOT), 4, 5, 128, 214Chicago Mercantile Exchange,5, 214Chicago Produce Exchange, 5Clarity, 196Clearinghouses, 8Client agreement, 193–194CMV (See Current market value)Cocoa, 104–105, 204–205Coffee, 102–104, 204–205COMEX, 114, 115Commercials, 10–11Commissions for retendering, 7Commitments of Traders inOptions and Futures, 175Commitments of Traders (COT)Report, 174–176Commodities, 5 (See also specificcommodities)competition characteristicsof, 82–81futures vs., 48inelastic, 77–78scalable (See Scalable commodities)as term, 5Commodities charts, 141, 144,160Commodity Futures TradingCommission (CFTC), 174,175, 184, 187, 188, 213Commodity indexes, 115, 116,145Commodity option agreement,184–185
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Commodity Pool Operators(CPOs), 186Commodity Reference Guide, 142,209Commodity Research Bureau(CRB) Index, 116Commodity sector binders,141–142, 144, 160, 180–181.(See also Scale Trader’sJournal)Commodity Trading Advisors(CTAs), 9, 185–189Competition, 81–82, 89, 90Complaints, grounds for, 189Compliance assistance, 213–215Conservative (C) traders, 70–71Contango, 138Continuous price charts, 84–85Contra party, 8Contract months, 7, 8, 126–127,135–136Contract specifications, 204–207corn, 67, 146silver, 155Contract(s):derivatives as, 2expiration of, 7–8forward, 3–4fungible, 4options, 5retendering of, 7terms and conditions of, 5to-arrive, 4Copper, 114, 206–207Corn, 92–94, 97–100contract specifications for, 67,204–205sample scales for, 58, 62, 63,148–150
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Corrections in supply anddemand, 51COT Report (See Commitmentsof Traders Report)Cotton, 106–107, 204–205Covered calls, 62CPOs (Commodity PoolOperators), 186CRB (Commodity ResearchBureau) Index, 116Credit checks, 184Crop Progress Reports (USDA),94Crop years, 13Cross trades, consent to, 184Crude oil and byproducts, 111,113, 206–207CTAs (See Commodity TradingAdvisors)C-traders (See Conservativetraders)Currency futures, 2, 116Current market value (CMV),23–24
DDaily volume, 169–170DAS (See Doane AgriculturalServices, Inc.)Day traders, 179DDC (Disclosure DocumentConfirmation), 185Deep-out-of-the-moneyoptions, 30–32Delayed quotes, 119Delivery notices, 7, 26Delta, 42–43Demand (See Supply anddemand)
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Derivative markets, 1–6. (Seealso specific topics)futures markets. (See Futuresmarkets, trading in)history of, 3–5options-on-futures markets(See Options-on-futuresmarkets, trading in)and price discovery, 3rights/obligations in, 2speculation in, 3and supply-demand ofunderlying entities, 2–3terms and conditions in, 5Disclosure DocumentConfirmation (DDC), 185Discretion:time and price, 186trading, 185Discretionary traders/trading,197–198Distant contracts, 126Distribution curves, 169Diversification in scale trading,125–126Doane Agricultural Services,Inc. (DAS), 48–49Doane’s Agricultural Report, The,48, 49
EEconomic laws of scale trading,56Economic Research Service(USDA), 142, 144Elasticity:of grain prices, 98and scalable commodities,90–91
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Elasticity (Cont.):semielasticity, 90–91of supply and demand, 77–78Electronic brokerage services,128End-of-day prices, 119–120Energy complex:contract specifications for,206–207industry group informationon, 145Energy-related futures contracts,113England, historic futuresmarket in, 3–4Entering markets, 56–58Entering scales:in hedged scale trading, 61price-quotation platforms for,120technical analysis for, 85–87Exchanges:futures, 214–215history of, 4–5margin committees of, 8Royal Exchange, London, 4for scale trading, 127–128trading only on U.S., 92Exchange-traded derivatives, 5Exchange-traded options, 22–23Exercising an option, 22, 27–28Exiting:markets, 56–58a trade, 14Expected returns, 180Expiration:of futures, 7–8, 26holding positions until, 30of options, 25–27
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Export inspections (USDA), 97Exports, grain, 93
FFair market value, 36Farm programs/subsidies, 78Farmer-hedgers, 11Fashion, 83FBI (Federal Bureau ofInvestigation), 189FCMs (futures commissionmerchants), 8FCOJ (See Frozen concentratedorange juice)Fear, 6Federal Bureau of Investigation(FBI), 189Federal Reserve Board, 181, 213Fill orders, 19Financial futures, 116Food and fiber complex,102–108contract specifications for,204–205industry group informationon, 145Forward contracts, 3–4Frozen concentrated orangejuice (FCOJ), 106, 204–205Fund transfer authorization,184Fundamental analysis, 12–14broker’s familiarity with, 123and corrections in supplyand demand, 51of futures markets, 12–14and information supply, 90processing information for,51–52
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Fundamental analysis (Cont.):of scalable commodities,83–84and timing of information, 50in traditional scale trading,49–52Fungibility, 5Fungible contracts, 4, 6Futures:commodities vs., 48contract specifications for,204–207definition of, 5exchanges for, 214–215organizations regulating,213–214securities vs., 182Futures commission merchants(FCMs), 8Futures magazine, 52, 99, 104,142, 210Futures magazine’s sourcebook,142, 210Futures markets, trading in,6–19basic concept of, 6–8and brokers, 11–12and commercials, 10–11dichotomies in, 6expiration of contracts in, 7–8fundamental analysis for,12–14history of, 3–4and liquidity, 8placing orders, 18–19price charts for, 15–18retendering of contracts in, 7speculators in, 9–10strategy/system for, 12–18
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Futures markets, trading in(Cont.):technical analysis for, 14–18trends, market, 16–17
GGamma, 43Global commodities, 77, 90“Going off the board,” 7Gold, 115, 206–207Goldman Sachs CommodityIndex (GSCI), 116, 206–207Good till canceled (GTC)orders, 19Grain complex, 92–103corn, beans, wheat, 92–94,97–100industry group informationon, 145oats, 99, 100rice, 100–101Russian market manipulationof, 50–51, 79soy meal/oil, 101–102USDA supply-demand table,95–96Grantor, 27Great Grain Robbery, 50–51, 79Greed, 6, 16, 192–194GSCI (See Goldman SachsCommodity Index)GTC (good till canceled)orders, 19
HHamilton, Milo, 75–76Hartfield Management, Inc., 142Heating oil, contract specifications for, 206–207
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Hedged scale trading, 61–72and certainty/uncertainty,64, 65and conservative traders,70–71creation of scales in, 62–66entry points in, 61and “just-in-case” traders,67–70levels of risk taking in, 67–72and margin calls, 65–66and market overreaction, 66and ultraconservativetraders, 71–72and volatility, 65Hedgers, 2, 11, 43Herd psychology, 166Hightower Report, The, 142, 209Historical red zones, 169–170Historical volatility, 35Hogs, 110, 204–205Hogs and Pigs Report (USDA),110Holding positions, 30Hunt family, 29, 176, 191–192
IIBs (introducing brokers), 8Ideal scales, 125Implied volatility, 35Industry group information,145Inelasticity, 77–78Inflation, 17, 85Information:accuracy of, 79–80disclosure of personal/financial, 184false, 52
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Information (Cont.):for grain trading, 93–97industry group, 145insider, 50–51overreaction to, 66for selection of commodities,90sources of, 142–143, 145,174–176, 209–215for technical analysis, 53verification of, 199Initial margin, 57, 149, 151Insider information, 50–51Intermediate-term traders, 179,180International CocoaOrganization, 105International CoffeeAgreement, 104International CoffeeOrganization, 105International Monetary Fund,105International politics, 78–79In-the-money options, 23, 24,31, 42Intrinsic value, 24, 25Introducing brokers (IBs), 8Inventory management perspective, 75–76Inverted markets, 138
JJacob (Old Testament), 3Janus, 6JIC scale traders (See “Just-incase” scale traders)Joint account agreement,184
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Journal (See Scale trader’sjournal)“Just-in-case” (JIC) scaletraders, 67–70
KKansas City Board of Trade,214Kill orders, 19
LLeg out, 72Leverage, 181Limit orders, 18–19, 45, 65Liquidity:definition of, 8and delivery/expirationtime, 7in futures markets, 8and grain trading, 99in options-on-futures trading,31–32, 44, 45and scalable commodities,85, 92and scalpers, 9in technical analysis, 85Livestock commodities, 204–205Locals (scalpers), 9Longs, 7, 21Long-term investors, 179Lumber, 107, 204–205
MMaintenance margin, 149, 151Margin(s), 147–151on futures contracts, 8initial, 149, 151maintenance, 149, 151setting, 181
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Margin(s) (Cont.):in traditional scale trading,57Margin calls, 65–66Margin money, 8Market on open/close orders,19Market orders, 18, 45Market overreaction, 66Market Wizards (JackSchwager), 9Market-if-touched (MIT)orders, 19Markets:derivative, 1–6high-volatility, 168inverted, 138thinly traded, 168–169McKnight, Paul, 144Meal, soy, 101–102Measurements for openingoptions positions, 42–43Meat complex, 107–114, 145Mediation, 187–188Mental stops, 44Metals complex, 113–115contract specifications for,206–207industry group informationon, 145MidAmerica CommodityExchange (MidAm),127–128, 180, 199–200, 214Minneapolis Grain Exchange,215MIT (market-if-touched)orders, 19Money management, 180Monopolistic competition, 81
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Months, contract (See Contractmonths)Moving averages, 86, 87
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NYMEX (See New YorkMercantile Exchange)NYSE (New York StockExchange), 4
NNamrevo, 144National Association ofSecurities Dealers, 213National culture, 78National Futures Association(NFA), 92, 184, 187, 188,214Natural disasters, 80Natural gas, 112–113, 206–207Nearby contracts, 7, 126,137–138New Market Wizards (JackSchwager), 9New York Board of Trade(NYBOT), 104, 105, 215New York Cotton Exchange,107New York Mercantile Exchange(NYMEX), 113, 215New York Stock Exchange(NYSE), 4News, 66, 80–81, 91–92NFA (See National FuturesAssociation)Noise index, 142, 143Noncash margin, disclosurestatement for, 183Noncommodity candidates,contract specifications for,206–207Notices of delivery (SeeDelivery notices)NYBOT (See New York Boardof Trade)
OOats, 99, 100, 204–205Offsetting, 30, 61–62, 122Oil, soy, 101–102Oligopoly market structures,81–82Omega Research, 141One cancels other orders, 19Online trading, 186–187Open interest, 18, 172–174Opening positions (SeeEntering scales)Option(s), 5 (See also specificoptions)covering long positions with,194as decaying financial instruments, 25–26definition of, 22exercising, 22thinly traded, 44Options-on-futures markets,trading in, 21–45, 22by amateurs, 37–39breakeven price, 37, 38and buyers’ understandingof options, 29–30buying options, 24–25and deep-out-of-the-moneyoptions, 31–32delta measurement in, 42–43expiration of options, 25–27and fair value of options, 36gamma measurement in, 43
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Options-on-futures markets,trading in (Cont.):and holding positions, 30and liquidity, 31–32, 44, 45magic words for, 21measurements used in, 42–43by professionals, 40and random price theory,35–36risks in, 28by semiprofessionals, 39–40shorting puts and calls, 27spreading commodities,40–42terms related to, 23–24and time value, 30–31types of orders in, 44–45use of stops in, 44and volatility, 32–35Orders:in futures markets, 18–19how and when to place, 123in options-on-futurestrading, 44–45tracking, 123Oscillating prices, 57, 59Oscillating profits, 57, 59, 61in areas of pricesupport/resistance,170–172and average daily pricemove, 121and foreknowledge ofmarket volatility, 152maximization of, 195–196and news, 80–81, 91–92and red zones, 165signals for, 156Oster Communications, Inc., 49
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OTC options (See Over-thecounter options)Out-of-the-money options, 24,31, 42Overreaction, market, 66Over-the-counter (OTC)options, 5, 22, 23
PPalladium, 113Paper trading, 180–183Patience, 200Perfect competition, 81, 89, 90Periodic assessments, 162–163Personality:of market, 64of traders, 195, 198–200Petroleum complex, 110–113Philadelphia Board of Trade,215Placing orders, 18–19Platinum, 113–114, 206–207POA (power of attorney), 185Politics, 78–79, 91, 98–99, 104,111Pork bellies, 108Positions on scales, 122Power of attorney (POA), 185Premiums, 126–127, 133–135,137Preservation of capital, 54Price(s):on bar charts, 17, 18breakeven, 37, 38calculation of new sell, 131depression of, 77of derivatives, 1end-of-day, 119–120and inflation, 85
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Price(s) (cont.):and law of supply anddemand, 56, 73–75oscillating, 57, 59and random price theory,35–36seasonal patterns in, 77,82–83, 122, 136, 138stair-stepping movement of,57, 59strike, 23–25, 31and volatility, 66Price charts, 15–17, 119–121analysis using, 84–85bar charts, 17–18continuous, 84–85creating, 120for scale trading, 119–121software packages forcreating, 119–121sources of, 84studying, 121trends shown by, 16–17Price congestion, 170–172Price discovery, 3Price discretion, 186Price forecast, 127Price patterns, 9Price resistance, 170–172Price support, 170–172Problem resolution, 187–189Pro Farmer, 49Professional speculators, 9Professional traders, 40Profitability, enhancing, 165Profit-loss projections, 146–147Profits:oscillating. (See Oscillatingprofits)
Profits (cont.):and size of scale intervals, 121Profit-taking table, 86Prudential Securities, 144Put options, 21, 23long/short, 21protective, 61, 62shorting, 27value of, 2
QQuotes, 119
RRandom price theory, 35–36Rational scales, 125Red zones, 156, 165, 169–174anticipating for success, 196historical, 169–170and open interest, 172–174and price congestion,170–172and seasonal price trends,176second scales for, 167–168and volatility, 168and volume, 172–174Regulation T, 181Research resources, 142–143,145, 174–176Resistance, price, 170–172Retendering of contracts, 7Return on equity, 146–147Rho, 43–44Rice, 100–101Rights of owners/traders, 2Risk(s) (See also Strategies(systems))communication of (by
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Risk(s) (Cont.):brokers), 29and inflation, 17levels of risk taking, 67–72in options-on-futurestrading, 28Risk disclosure statement, 183Risk management, 2, 40–41Rollovers, 129–139and calculation of new sellprices, 131and contract months, 135–136and