higher than the nearest delivery month, usually due to the cost ofholding the commodity (i.e., storage, insurance, interest, spoilage, etc.).Contract A term of reference describing a unit of trading for a commodity.Contract Grades Standards or grades of commodities listed in the rules of theexchanges that must be met when delivering cash commodities against futurescontracts. Grades are often accompanied by a schedule of discounts and premiums allowable for delivery of commodities of lesser or greater quality than thecontract grade.Contract Market A board of trade designated by the Commodity FuturesTrading Commission to trade futures or option contracts on a particular commodity. Commonly used to mean any exchange on which futures are traded. Seealso Board of Trade and Exchange.Contract Month The month in which delivery is to be made in accordance witha futures contract.Controlled Account See Discretionary Account.
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Corner To secure control of a commodity so that its price can be manipulated.Correction A price reaction against the prevailing trend of the market. Commoncorrections often amount to 33 percent, 50 percent, or 66 percent of the most recenttrend movement. Sometimes referred to as retracements.Cost of Recovery Administrative costs or expenses incurred in obtaining moneydue the complainant. Included are such costs as administrative fees, hearing roomfees, charge for clerical services, travel expenses to attend the hearing, attorneyfees, filing costs, etc.Cover To offset a previous futures transaction with an equal and opposite transaction. Short covering is a purchase of futures contracts to cover an earlier sale ofan equal number of the same delivery month; liquidation is the sale of futures contracts to offset the obligation to take delivery on an equal number of futures contracts of the same delivery month purchased earlier.Cox-Ross-Rubinstein Option Pricing Model An option pricing model that cantake into account factors not allowable in Black-Scholes, such as early exercise,price supports, etc.Current Delivery (Month) The futures contract that will come to maturity andbecome deliverable during the current month; also called “spot month.”Customer Segregated Funds See Segregated Account.Day Order An order that if not executed expires automatically at the end of thetrading session on the day it was entered.Day Traders Commodity traders, generally members of the exchange active onthe trading floor, who take positions in commodities and then liquidate themprior to the close of the trading day.Dealer Option A put or call on a physical commodity, not originating on or subject to the rules of an exchange, written by a firm that deals in the underlying cashcommodity.Debit Balance Accounting condition where the trading losses in a customer’saccount exceed the amount of equity in the customer’s account.Deck All of the unexecuted orders in a floor broker’s possession.Default (1) In the futures market, the failure to perform on a futures contractas required by exchange rules, such as a failure to meet a margin call or to makeor take delivery. (2) In reference to the federal farm loan program, the decisionon the part of a producer of commodities not to repay the government loan, butinstead to surrender his or her crops. This usually floods the market, drivingprices lower.Deferred Delivery The distant delivery months in which futures trading is taking place, as distinguished from the nearby futures delivery month.Deliverable Grades See Contract Grades.Delivery The tender and receipt of an actual commodity or warehouse receiptor other negotiable instrument covering such commodity in settlement of afutures contract.
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Delivery Month A calendar month during which a futures contract matures andbecomes deliverable.Delivery Notice Notice from the clearinghouse of a seller’s intention to deliverthe physical commodity against a short futures position; precedes and is distinctfrom the warehouse receipt or shipping certificate, which is the instrument oftransfer of ownership.Delivery Points Those locations designated by commodity exchanges at whichstocks of a commodity represented by a futures contract may be delivered in fulfillment of the contract.Delivery Price The official settlement price of the trading session during whichthe buyer of futures contracts receives through the clearinghouse a notice of theseller’s intention to deliver and the price at which the buyer must pay for the commodities represented by the futures contract.Discount (1) A downward adjustment in price allowing for delivery of stocks ofa commodity of lesser than deliverable grade against a futures contract. (2)Sometimes used to refer to the price difference between futures of different delivery months, as in the phrase “July at a discount to May,” indicating that the priceof the July future is lower than that of the May.Discovery The process that allows one party to obtain information and documents relating to the dispute from the other party(ies) in the dispute.Discretionary Account An arrangement by which the holder of the accountgives written power of attorney to another, often a broker, to make buying andselling decisions without notification to the holder; often referred to as a managedaccount or controlled account.Elasticity A characteristic of commodities that describes the interaction of the supply, demand, and price of a commodity. A commodity is said to be elastic in demandwhen a price change creates an increase or decrease in consumption. The supply ofa commodity is said to be elastic when a change in price creates a change in the production of the commodity. Inelasticity of supply or demand exists when either supply or demand is relatively unresponsive to changes in price.Elliot Wave Theory Developed by Ralph Elliot, who believed the stock marketmoved up and down in predictable wave patterns in harmony with nature. Heused Fibonacci numbers to prove his theory.Equity The dollar value of a futures trading account if all open positions wereoffset at the going market price.Exchange An association of persons engaged in the business of buying and selling commodity futures and/or options. See also Board of Trade and ContractMarket.Exercise Exercising an option means electing to accept the underlying futurescontract at the option’s strike price.Exercise Price The price at which the buyer of a call (put) option may choose toexercise his right or her to purchase (sell) the underlying futures contract. Alsocalled strike price.
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Expiration Date Generally the last date on which an option may be exercised.Feed Ratios The variable relationships of the cost of feeding animals to marketweight sales prices, expressed in ratios, such as the hog/corn ratio. These serve asindicators of the profit return or lack of it in feeding animals to market weight.Fibonacci Number or Sequence of Numbers The sequence of numbers (0, 1, 2,3, 5, 8, 13, 21, 34, 55, 89, 144, 233...), discovered by the Italian mathematicianLeonardo de Pise in the thirteenth century and the mathematical basis of theElliott theory, among others.Fiduciary Duty Responsibility imposed by operation of law (from congressional policies underlying the Commodity Exchange Act) requiring that the broker actwith special care in the handling of a customer’s account.First Notice Day First day on which notices of intention to deliver cash commodities against futures contracts can be presented by sellers and received bybuyers through the exchange clearinghouse.Floor Broker An individual who executes orders on the trading floor of anexchange for any other person.Floor Traders Members of an exchange who are personally present, on the trading floors of exchanges, to make trades for themselves and their customers.Sometimes called scalpers or locals.F.O.B. Free on board; indicates that all delivery, inspection, and elevation orloading costs involved in putting commodities on board a carrier have been paid.Forward Contracting A cash transaction common in many industries, includingcommodities, in which the buyer and seller agree upon delivery of a specifiedquality and quantity of goods at a specified future date. Specific price may beagreed upon in advance, or there may be agreements that the price will be determined at the time of delivery on the basis of either the prevailing local cash priceor a futures price.Free Supply Stocks of a commodity which are available from commercial sale,as distinguished from government-owned or controlled stocks.Fully Disclosed An account carried by the Futures Commission Merchant in thename of the individual customer; opposite of an omnibus account.Fundamental Analysis An approach to analysis of futures markets and commodity futures price trends that examines the underlying factors that will affectthe supply and demand of the commodity being traded in futures. See alsoTechnical Analysis.Futures Commission Merchant (FCM) An individual or organization that solicits or accepts orders to buy or sell futures contracts or commodity options andaccepts money or other assets from customers in connection with such orders.Must be registered with the Commodity Futures Trading Commission.Futures Contract A standardized binding agreement to buy or sell a specifiedquantity or grade of a commodity at a later date, i.e., during a specified month.Futures contracts are freely transferable and can be traded only by public auctionon designated exchanges.
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Futures Industry Association (FIA) The national trade association for thefutures industry.Gap A trading day during which the daily price range is completely above orbelow the previous day’s range, causing a gap between them to be formed. Sometraders then look for a retracement to “fill the gap.”Grantor A person who sells an option and assumes the obligation, but not theright, to sell (in the case of a call) or buy (in the case of a put) the underlyingfutures contract or commodity at the exercise price. See also Writer.Gross Processing Margin (GPM) Refers to the difference between the cost ofsoybeans and the combined sales income of the soybean oil and meal that resultsfrom processing soybeans.Guided Account An account that is part of a program directed by a CommodityTrading Advisor or broker, but the person trading must review each trade inadvance with the account holder.Hedging The sale of futures contracts in anticipation of future sales of cash commodities as a protection against possible price declines, or the purchase of futurescontracts in anticipation of future purchases of cash commodities as a protectionagainst increasing costs. See also Buying Hedge, Selling Hedge.Inelasticity A characteristic that describes the interdependence of the supply,demand, and price of a commodity. A commodity is inelastic when a price changedoes not create an increase or decrease in consumption; inelasticity exists whensupply and demand are relatively unresponsive to changes in price. See alsoElasticity.Initial Margin Customers’ funds required at the time a futures position is established, or an option is sold, to assure performance of the customers’ obligations.Margin in commodities is not a down payment, as it is in securities. See alsoMargin.In-the-Money An option having intrinsic value. A call is in-the-money if itsstrike price is below the current price of the underlying futures contract. A put isin-the-money if its strike price is above the current price of the underlying futurescontract.Intrinsic Value The absolute value of the in-the-money amount—that is, theamount that would be realized if an in-the-money option were exercised.Introducing Broker (IB) A firm or individual that solicits and accepts commodity futures orders from customers but does not accept money, securities, or property from customers. An IB must be registered with the Commodity FuturesTrading Commission and must carry all of its accounts through an FCM on a fullydisclosed basis.Inverted Market Futures market in which the nearer months are selling at premiums over the more distant months; characteristically, a market in which supplies are currently in shortage.Invisible Supply Uncounted stocks of a commodity in the hands of wholesalers, manufacturers, and producers that cannot be identified accurately; stocksoutside commercial channels but theoretically available to the market.
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Last Trading Day Day on which trading ceases for the maturing (current) delivery month.Leverage Essentially allows an investor to establish a position in the marketplace by depositing funds that are less than the value of the contract.Leverage Contract A standardized agreement calling for the delivery of a commodity with payments against the total cost spread out over a period of time.Principal characteristics include standard units and quality of a commodity andterms and conditions of the contract; payment and maintenance of margin; closeout by offset or delivery (after payment in full); and no right to or interest in a specific lot of the commodity. Leverage contracts are not traded on exchanges.Leverage Transaction Merchant (LTM) The firm or individual through whichleverage contracts are entered. LTMs must be registered with the CommodityFutures Trading Commission.Life of Contract Period between the beginning of trading in a particular futureand the expiration of trading in the delivery month.Limit See Position Limit, Price Limit, Reporting Limit, and Variable Limit.Limit Move A price that has advanced or declined the limit permitted duringone trading session as fixed by the rules of a contract market.Limit Order An order in which the customer sets a limit on either price or timeof execution, or both, as contrasted with a market order, which implies that theorder should be filled at the most favorable price as soon as possible.Liquidation Usually the sale of futures contracts to offset the obligation to takedelivery of an equal number of futures contracts of the same delivery month purchased earlier. Sometimes refers to the purchase of futures contracts to offset a previous sale.Liquidity (or liquid market) A broadly traded market in which buying and selling can be accomplished with small price changes and bid and offer price spreadsare narrow.Liquid Market A market in which selling and buying can be accomplished easily due to the presence of many interested buyers and sellers.Loan Program Primary means of government agricultural price support operations in which the government lends money to farmers at announced rates withcrops used as collateral. Default on these loans is the primary method by whichthe government acquires stocks of agricultural commodities.Long One who has bought a cash commodity or a commodity futures contract,in contrast to a short, who has sold a cash commodity or futures contract.Long Hedge Buying futures contracts to protect against possible increasedprices of commodities. See also Hedging.Maintenance Margin The amount of money that must be maintained on depositwhile a futures position is open. If the equity in a customer’s account drops underthe maintenance margin level, the broker must issue a call for money that willrestore the customer’s equity in the account to required initial levels. See alsoMargin.
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Margin In the futures industry, it is an amount of money deposited by both buyers and sellers of futures contracts to ensure performance against the contract. Itis not a down payment.Margin Call A call from a brokerage firm to a customer to bring margin depositsback up to minimum levels required by exchange regulations; similarly, a request bythe clearinghouse to a clearing member firm to make additional deposits to bringclearing margins back to minimum levels required by clearinghouse rules.Market Order An order to buy or sell futures contracts that is to be filled at thebest possible price and as soon as possible. This is in contrast to a limit order, whichmay specify requirements for price or time of execution. See also Limit Order.Maturity Period within which a futures contract can be settled by delivery of theactual commodity; the period between the first notice day and the last trading dayof a commodity futures contract.Maximum Price Fluctuation See Limit Move.Minimum Price Fluctuation See Point.Misrepresentation An untrue or misleading statement concerning a material factrelied upon by a customer when making his or her decision about an investment.Momentum Indicator A line that is plotted to represent the difference betweentoday’s price and the price of a fixed number of days ago. Momentum can be measured as the difference between today’s price and the current value of a movingaverage. Often referred to as momentum oscillators.Moving Average A mathematical procedure to smooth or eliminate the fluctuations in data. Moving averages emphasize the direction of a trend, confirm trendreversals, and smooth out price and volume fluctuations or “noise” that can confuse interpretation of the market. See Chapter 2 for examples.National Association of Futures Trading Advisors (NAFTA) The national tradeassociation of Commodity Pool Operators (CPOs), Commodity Trading Advisors(CTAs), and related industry participants.National Futures Association (NFA) The national self-regulatory organizationof the futures industry.Nearby Delivery (Month) The futures contract closest to maturity.Nearbys The nearest delivery months of futures contract.Net Asset Value The value of each unit of a commodity pool. Basically, a calculation of assets minus liabilities plus or minus the value of open positions(marked-to-the-market) divided by the number of units.Net Performance An increase or decrease in net asset value exclusive of additions, withdrawals, and redemptions.Net Position The difference between the open long (buy) contracts and the openshort (sell) contracts held by any one person in any one futures contract month orin all months combined.Nominal Price Declared price for a futures month sometimes used in place of aclosing price when no recent trading has taken place in that particular deliverymonth; usually an average of the bid and ask prices.
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Nondisclosure Failure to disclose a material fact needed by the customer tomake a decision regarding an investment.Normalizing An adjustment to data, such as a price series, to put it within normal or more standard range. A technique used to develop a trading system.Notice Day See First Notice Day.Notice of Delivery See Delivery Notice.Offer An indication of willingness to sell at a given price; opposite of bid.Offset The liquidation of a purchase of futures through the sale of an equalnumber of contracts of the same delivery months, or the covering of a short saleof futures contracts through the purchase of an equal number of contracts of thesame delivery month. Either action transfers the obligation to make or take delivery of the actual commodity to someone else.Omnibus Account An account carried by one futures commission merchantwith another in which the transactions of two or more persons are combinedrather than designated separately, and the identities of the individual accounts arenot disclosed.Open The period at the beginning of the trading session officially designated bythe exchange during which all transactions are considered made “at the open.”Opening Range Range of closely related prices at which transactions took placeat the opening of the market; buying and selling orders at the opening might befilled at any point within such a range.Open Interest The total number of futures contracts of a given commodity thathave not yet been offset by opposite futures transactions or fulfilled by delivery ofthe actual commodity; the total number of open transactions, with each transaction having a buyer and a seller.Open Outcry Method of public auction for making bids and offers in the trading pits or rings of commodity exchanges.Open Trade Equity The unrealized gain or loss on open positions.Option Contract A unilateral contract that gives the buyer the right, but notthe obligation, to buy or sell a specified quantity of a commodity or a futurescontract at a specific price within a specified period of time, regardless of themarket price of that commodity or futures contract. The seller of the option hasthe obligation to sell the commodity or futures contract or buy it from the optionbuyer at the exercise price if the option is exercised. See also Call (option) andPut (option).Option Premium The money, securities, or property the buyer pays to the writer(grantor) for granting an option contract.Option Seller See Grantor.Order Execution Handling of a customer order by a broker—includes receivingthe order verbally or in writing from the customer, transmitting it to the tradingfloor of the exchange where the transaction takes place, and returning confirmation (fill price) of the completed order to the customer.Orders See Market Order, Stop Order.
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Original Margin Term applied to the initial deposit of margin money requiredof clearing member firms by clearinghouse rules; parallels the initial margindeposit required of customers.Out-of-the-Money A call option with a strike price higher or a put option witha strike price lower than the current market value of the underlying asset.Overbought A technical opinion that the market price has risen too steeply andtoo fast in relation to underlying fundamental factors.Oversold A technical opinion that the market price has declined too steeply andtoo fast in relation to underlying fundamental factors.P&S Statement See Purchase and Sale Statement (P&S).Par A particular price, 100 percent of principal value.Parity A theoretically equal relationship between farm product prices and allother prices. In farm program legislation, parity is defined in such a manner thatthe purchasing power of a unit of an agricultural commodity is maintained at itslevel during an earlier historical base period.Pit A specially constructed arena on the trading floor of some exchanges wheretrading in a futures or options contract is conducted by open outcry. On otherexchanges, the term “ring” designates the trading area for a futures or optionscontract.Point The minimum fluctuation in futures prices or options premiums.Point Balance A statement prepared by Futures Commission Merchants to showprofit or loss on all open contracts by computing them to an official closing or settlement price.Pool See Commodity Pool.Position A market commitment. For example, a buyer of futures contracts is saidto have a long position and, conversely, a seller of futures contracts is said to havea short position.Position Limit The maximum number of futures contracts in certain regulatedcommodities that one can hold, according to the provisions of the CFTC.Position Trader A commodity trader who either buys or sells contracts and holdsthem for an extended period of time, as distinguished from the day trader, who willnormally initiate and liquidate a futures position within a single trading session.Premium (1) The additional payment allowed by exchange regulations fordelivery or higher-than-required standards or grades of a commodity against afutures contract. In speaking of price relationships between different deliverymonths of a given commodity, one is said to be trading at a premium over another when its price is greater than that of the other. (2) Also can mean the amountpaid a grantor or writer of an option by a trader.Price Limit Maximum price advance or decline from the previous-day settlement price permitted for a commodity in one trading session by the rules of theexchange.Primary Markets The principal market for the purchase and sale of a cash commodity.
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Principal Refers to a person that is a principal of a particular entity. (1) Any person including, but not limited to, a sole proprietor, general partner, officer ordirector, or person occupying a similar status or performing similar functions,having the power, directly or indirectly, through agreement or otherwise, to exercise a controlling influence over the activities of the entity. (2) Any holder or anybeneficial owner of 10 percent or more of the outstanding shares of any class ofstock of the entity. (3) Any person who has contributed 10 percent or more of thecapital of the entity.Private Wires Wires leased by various firms and news agencies for the transmission of information to branch offices and subscriber clients.Proceeding Clerk The member of the commission’s staff in the Office ofProceedings who maintains the Commission’s reparations docket, assigns reparation cases to an appropriate CFTC official, and acts as custodian of the records ofproceedings.Producer A person or entity that produces (grows, mines, etc.) a commodity.Public Elevators Grain storage facilities, licensed and regulated by state andfederal agencies, in which space is rented out to whoever is willing to pay for it;some are also approved by the commodity exchanges for delivery of commoditiesagainst futures contracts.Purchase and Sale Statement (P&S) A statement sent by a commission house toa customer when a futures or options position has been liquidated or offset. Thestatement shows the number of contracts bought or sold, the gross profit or loss,the commission charges, and the net profit or loss on the transaction. Sometimescombined with a confirmation statement.Purchase Price The total actual cost paid by a person for entering into a commodity option transaction, including premium, commission, or any other direct orindirect charges.Put (option) An option that gives the option buyer the right but not the obligation to sell the underlying futures contract at a particular price on or before a particular date.Pyramiding The use of profits on existing futures positions as margins toincrease the size of the position, normally in successively smaller increments, suchas the use of profits on the purchase of five futures contracts as margin to purchasean additional four contracts, whose profits will in turn be used to margin an additional three contracts.Quotation The actual price or the bid or ask price of either cash commodities orfutures or options contracts at a particular time. Often called a quote.Rally An upward movement of prices. See also Recovery.Rally Top The point at which a rally stalls. A bull move will usually make several rally tops over its life.Range The difference between the high and low price of a commodity during agiven period, usually a single trading session.Reaction A short-term countertrend movement of prices.
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Receivership A situation in which a receiver has been appointed. A receiver is aperson appointed by a court to take custody and control of and manage the property or funds of another pending judicial action concerning them.Recovery An upward movement of prices following a decline.Registered Commodity Representative (RCR) See Broker or AssociatedPerson (AP).Regulations (CFTC) The regulations adopted and enforced by the federal overseer of futures markets, the Commodity Futures Trading Commission, in order toadminister the Commodity Exchange Act.Reparations Compensation payable to a wronged party in a futures or optionstransaction. The term is used in conjunction with the Commodity Futures TradingCommission’s customer claims procedure to recover civil damages.Reparations Award The amount of monetary damages a respondent may beordered to pay to a complainant.Reporting Limit Sizes of positions set by the exchange and/or the CFTC at orabove which commodity traders must make daily reports to the exchange and/orthe CFTC as to the size of the position by commodity, by delivery month, andaccording to the purpose of trading, i.e., speculative or hedging.Resistance The price level at which a trend stalls. Opposite of a support level.Prices must build momentum to move through resistance.Respondents The individuals or firms against which a complaint is filed and areparations award is sought.Retender The right of holders of futures contracts who have been tendered adelivery notice through the clearinghouse to offer the notice for sale on the openmarket, liquidating their obligation to take delivery under the contract; applicableonly to certain commodities and only within a specified period of time.Retracements Price movements in the opposite direction of the prevailing trend.See Correction.Ring A circular area on the trading floor of an exchange where traders and brokers stand while executing futures or options trades. Some exchanges use pitsrather than rings.Round Lot A quantity of a commodity equal in size to the corresponding futurescontract for the commodity, as distinguished from a job lot, which may be largeror smaller than the contract.Round Turn The combination of an initiating purchase or sale of a futures contract and offsetting sale or purchase of an equal number of futures contracts to thesame delivery month. Commission fees for commodity transactions cover theround turn.Rules (NFA) The standards and requirements to which participants who arerequired to be members of the National Futures Association must subscribe andconform.Sample Grade In commodities, usually the lowest quality acceptable for delivery in satisfaction of futures contracts. See Contract Grades.
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Scalper A speculator on the trading floor of an exchange who buys and sellsrapidly, with small profits or losses, holding positions for only a short time duringa trading session. Typically, a scalper will stand ready to buy at a fraction below thelast transaction price and to sell at a fraction above, thus creating market liquidity.Security Deposit See Margin.Segregated Account A special account used to hold and separate a customer’sassets from those of the broker or firm.Selling Hedge Selling futures contracts to protect against possible decreasedprices of commodities which will be sold in the future. See Hedging and/or ShortHedge.Settlement Price The closing price, or a price within the range of closing prices,which is used as the official price in determining net gains or losses at the close ofeach trading session.Short One who has sold a cash commodity or a commodity futures contract, incontrast to a long, who has bought a cash commodity or futures contract.Short Hedge Selling futures to protect against possible decreasing prices of commodities. See also Hedging.Speculator One who attempts to anticipate commodity price changes and makeprofits through the sale and/or purchase of commodity futures contracts. A speculator with a forecast of advancing prices hopes to profit by buying futures contracts and then liquidating the obligation to take delivery with a later sale of anequal number of futures of the same delivery month at a higher price. A speculator with a forecast of declining prices hopes to profit by selling commodity futurescontracts and then covering the obligation to deliver with a later purchase offutures at a lower price.Spot Market for the immediate delivery of the product and immediate payment.May also refer to the nearest delivery month of a futures contract.Spot Commodity See Cash Commodity.Spread (or Straddle) The purchase of one futures delivery month against thesale of another futures delivery month of the same commodity; the purchase ofone delivery month of one commodity against the sale of the same deliverymonth of a different commodity; or the purchase of one commodity in one market against the sale of that commodity in another market, to take advantage ofand profit from the distortions resulting from the normal price relationships thatsometimes occur. The term is also used to refer to the difference between theprice of one futures month and the price of another month of the same commodity. See also Arbitrage.Stop Loss A risk management technique used to close out a losing position at agiven point. See Stop Order.Stop Order An order that becomes a market order when a particular price levelis reached. A sell stop is placed below the market; a buy stop is placed above themarket. Sometimes referred to as a stop loss order.Strike Price See Exercise Price.
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Support A price level at which a declining market has stopped falling. Oppositeof a resistance price range. Once this level is reached, the market trades sidewaysfor a period of time.Switch Liquid