Investment Trading Glossary
Home
Trade
Center Inc.
Investor
Services
About
Futures Trading
About
Forex Trading
Trading
Systems
Selecting
trading system
Why
use trading systems
Why
use TCI
Trade
execution services
Portfolio
administration
Online
commodity trading
Global
markets
Risk
disclosure
Basics
of futures trading
Margins
explained
Financial
safeguards
Opportunities
Portfolio
construction
Alternative
investments
Forex
vs. futures
Forex
vs. stocks
A
brief chronicle
Currency
pairs
Technicle
vs. fundamental
Margins
and details
Types
of Forex orders
Forex
Glossary
FAQ's
Mini
trading
Trading
system stratigies
American-style
options
Options that permit exercise at any time on or before the expiration date.
Arbitrage
The simultaneous purchase and sale of identical or equivalent financial
instruments or commodity futures in order to benefit from a discrepancy
in their price relationship.
Ask
Also called "offer." Indicates a willingness to sell a futures
contract at a given price. See Bid.
Assignment
Notice to the seller of an option that has been exercised by the buyer.
Associated
person (AP)
A person, commonly called a commodity broker, associated with and soliciting
customers and orders for a futures commission merchant or introducing
broker. The AP must pass a Series 3 examination, be licensed by the CFTC
and be a member of the NFA.
At-the-money
An option with a strike price equal to the underlying futures price.
Back months
The futures or options on futures months being traded that are furthest
from expiration. Also called deferred or distant months.
Bar chart
A graph of prices, volume and open interest for a specified time period
used by the chartist to forecast market trends. A daily bar chart plots
each trading session's high, low and settlement prices.
Basis
The local cash market price minus the price of the nearby futures contract.
Basis contract
A forward contract in which the cash price is based on the basis relating
to a specified futures contract.
Bear
One who believes prices will move lower.
Bear market
A market in which prices are declining.
Bear spread
A vertical spread involving the sale of the lower strike call and the
purchase of the higher strike call, called a bear call spread. Also, a
vertical spread involving the sale of the lower strike put and the purchase
of the higher strike put, called a bear put spread.
Bearish key
reversal
A bar chart formation that occurs in an uptrending market when the day's
high is higher, low is lower and close is below the previous
day's. Can
signal an upcoming downtrend.
Bid
The price that the market participants are willing to pay.
Blowoff volume
An extraordinarily high volume trading session occurring suddenly in an
uptrend signaling the end of the trend.
Breakaway
gap
A gap in prices that signals the end of a price pattern and the beginning
of an important market move.
Breakeven
The point at which an option buyer or seller experiences no loss and no
profit on an option. Call breakeven equals the strike price plus the premium.
Put breakeven equals the strike price minus the premium.
Broker
A firm or person engaged in executing orders to buy or sell futures contracts
for customers. A full service broker offers market information and advice
to assist the customer in trading. A discount broker simply executes orders
for customers.
Brokerage
house
A firm that handles orders to buy and sell futures and options contracts
for customers.
Bull
One who expects prices to rise.
Bull market
A market in which prices are rising.
Bull spread
A vertical spread involving the purchase of the lower strike call and
the sale of the higher strike call, called a bull call spread. Also, a
vertical spread involving the purchase of the lower strike put and the
sale of the higher strike put, called a bull put spread.
Bullish key
reversal
A bar chart formation that occurs in a downtrending market when the day's
high is higher, low is lower and close is above the previous day's. Can
signal an upcoming uptrend.
Buy On Opening
To buy at the beginning of a trading session at a price within the opening
range.
Cabinet Trade
or cab
A trade that allows options traders to liquidate deep out-of-the- money
options by trading the option at a price equal to one-half tick.
Call
An option to buy a commodity, security or futures contract at a specified
price any time between now and the expiration date of the option contract.
See Option
Call breakeven
See Breakeven
Call profit/loss
For a long call, equal to the call value minus the premium. For a short
call, equal to the premium minus the call value.
Call value
At expiration, equal to the futures price minus the strike price of the
call.
Car
A loosely used term to describe contract quantities.
Carryover
Last year's ending stocks of a storable commodity.
Cash commodity
The actual physical
commodity as distinguished from a futures contract.
Cash price
Current market price
of the actual physical commodity. Also called "spot price."
Cash sales
The sale of commodities
in local cash markets such as elevators, terminals, packing houses and
auction markets.
Cash settlement
Final disposition of
open positions on the last trading day of a contract month. Occurs in
markets where there is no actual delivery.
CFTC
Acronym for the Commodity
Futures Trading Commission as created by the Commodity Futures Trading
Commission Act of 1974. This government agency currently regulates the
nation's commodity futures industry.
Chartist
One who engages in
technical analysis.
Clearing House
An adjunct to the CME
responsible for settling trading accounts, clearing trades, collecting
and maintaining performance bond funds, regulating delivery and reporting
trading data.
Close
The period at
the end of the trading session. Sometimes used to refer to the closing
range.
Closing range
The high and low prices,
or bids and offers, recorded during the period designated as the official
close. See Settlement price.
Commission
For futures
contract, the one-time fee charged by a broker to cover the trades you
make to open and close each position, payable when you exit the position.
Also called round-turn. Commissions on options are usually half on initiation
and half on liquidation.
Commitment
When a trader or institution
assumes the obligation to accept or make delivery on a futures contract.
Commodity
exchange
An organization that
formulates rules and procedures for the trading of futures and options
on futures contracts, provides physical facilities for trading and/or
access to electronic trading technologies, and oversees trading practices.
Contract
Unit of trading for
a financial or commodity future. Also, actual bilateral agreement between
the parties (buyer and seller) of a futures or options on futures transaction
as defined by an exchange.
Contract month
The month in which
futures contracts may be satisfied by making or accepting delivery. Also
called the delivery month.
Credit spread
An option spread in
which there is a net collection of premium.
Day order
An order that will
be filled during the day's trading session or canceled.
Day trader
A trader who establishes
and liquidates positions within one day's trading, ending the day with
no established position in the market.
Day trading
Refers to establishing
and liquidating the same position or positions within one day's trading,
thus ending the day with no established position in the market.
Debit spread
An option spread in
which there is a net payout of premium.
Deferred
See Back Months.
Deferred pricing
agreement
A cash sale in which
you deliver the commodity and agree with the buyer to price it at a later
time.
Delivery
The tender and
receipt of an actual commodity of financial instrument in settlement of
a futures contract.
Delivery month
See Contract Month
Delta
The measure of the
price-change relationship between an option and the underlying futures
price. Equal to the change in premium divided by the change in futures
price.
Demand
The quantity of a commodity
that buyers are willing to purchase from the market at a given price.
Discount broker
See Broker
Distant
See
Back Months
Double top,
bottom
A bar chart formation
that signals a possible trend reversal. In a point and figure chart, double
tops and bottoms are used for buy and sell signals.
Downtrend
A price trend characterized
by a series of lower highs and lower lows.
DRT
See With discretion
Electronic
trading
Trading via computer
through an automated, order entry and matching system. GLOBEX® is
an example of an international electronic trading system.
Elliot wave
theory
A type of technical
analysis that studies price wave sequences.
Ending stocks
The amount of a storable
commodity remaining at the end of a year.
European-style
options
Options that may be
exercised only on the option's expiration date.
Exercise
The process
of an option holder exchanging it for the underlying futures contract.
Exercise notice
A notice tendered by
a brokerage firm to the CME Clearing House that exchanges an option for
a futures contract.
Exercise price
The price at which
the holder (buyer) may purchase or sell the underlying futures contract.
Also called strike price.
Exhaustion
gap
A gap in prices near
the top or bottom of a price move that signals an abrupt turn in the market.
Expiration
date
The last day that an
option may be exercised into the underlying futures contract. Also, the
last day of trading for a futures contract.
Expire
Letting the expiration
date for an option pass without exercising or offsetting the option.
Fast market
Term used to define
unusually hectic market conditions.
Fill-or-kill
order (FOK)
A limit order that
must be filled immediately or canceled.
FLEX®
options
Flexible term options
providing more expiration dates and a broader range of strike prices,
available in American- or European-style.
Floor broker
An exchange member
who is paid a fee for executing orders for clearing members or their customers.
A floor broker executing orders must be licensed by the CFTC.
Floor trader
An exchange member
who generally trades only his or her own account or for an account controlled
by him or her. Also referred to as a local.
Forward contract
A private agreement
between buyer and seller for the future delivery of a commodity at an
agreed price.
Full service
broker
See Broker
Fundamental
analysis
The study of supply
and demand information to help project futures prices.
Fundamentalist
One who engages in
fundamental analysis.
Futures
A term used to designate
all contracts covering the purchase and sale of financial instruments
or physical commodities for future delivery on a commodity futures exchange.
Futures commission
merchant (FCM)
A firm or person engaged
in soliciting or accepting and handling orders for the purchase or sale
of futures contracts, subject to the rules of a futures exchange and,
who, in connection with solicitation or acceptance of orders, accepts
any money or securities to margin any resulting trades or contracts. The
FCM must be licensed by the CFTC.
Futures contract
A standardized agreement,
traded on a futures exchange, to buy or sell a commodity at a specified
price at a date in the future. Specifies the commodity, quality, quantity,
delivery date and delivery point or cash settlement.
Gamma
The measure of the
change in an option's delta given a change in the futures price. Equal
to the change in delta divided by the change in futures price.
Gap
A price area at which
the market didn't trade from one day to the next. See Breakaway gap, Exhaustion
gap, Runaway gap.
Gap theory
A type of technical
analysis that studies gaps in prices.
Good-til (GT)
An order that remains
in effect until it's canceled or until the specified date is passed.
Good-til-canceled
(GTC)
An order that remains
in effect until it's canceled, filled or until the contract expires.
Historical
volatility
See Volatility
Holder
One who purchases an
option.
Head and shoulders
A sideways price formation at the top or bottom of the market that indicates
a major market reversal.
Hedge
The purchase or sale
of a futures contract as a temporary substitute for a cash market transaction
to be made at a later date. Usually it involves opposite positions in
the cash market and futures market
at the same time. See Long Hedge and Short Hedge.
Hedger
A person or firm who
uses the futures market to offset price risk when intending to sell or
buy the actual commodity. See Pure hedger, Selective hedger.
Hedging
The purchase or sale
of a futures contract as a temporary substitute for a cash market transaction
to be made at a later date.
Hedging line
of credit
Financing from your
lender for the purpose of hedging the sale and purchase of commodities.
Holder
One who purchases an
option.
Hundredweight
100 pounds. Abbreviated
cwt.
Implied volatility
See Volatility
Initial performance
bond
The funds required
when a futures position (or a short options on futures position) is opened.
Previously referred to as initial margin. See Performance Bond.
Inter-commodity
spread
A spread trade involving
the same month of different but related futures contracts.
Inter-market
spread
A spread trade involving
same or related commodities at different exchanges. Also called an inter-exchange
spread.
In-the-money
A call option with
a strike price less than the underlying futures price. A put option with
a strike price greater than the underlying futures price.
Intra-market
spread
A spread trade involving
different contract months of the same commodity. Also called an inter-delivery
spread.
Intrinsic
value
The relationship of
an option's in-the-money strike price to the current futures price. For
a put: Strike Price - Futures Price. For a call: Futures Price - Strike
Price.
Introducing
broker (IB)
A firm or person engaged
in soliciting or accepting and handling orders for the purchase or sale
of futures contracts, subject to the rules of a futures exchange, but
not in accepting any money or securities to margin any resulting trades
or contracts. The IB is associated with a correspondent futures commission
merchant and must be licensed by the CFTC.
Leverage
The use of a
small amount of assets to control a greater amount of assets.
Limit order
An order that can be
filled only at a specified price or better.
Limit move
See Maximum price fluctuation.
Liquidation
Any transaction
that offsets or closes out a long or short futures or options on futures
position.
Livestock
cycle
A long, repeating pattern
of increasing and decreasing livestock supply and prices.
Long
One who has bought
a futures or options on futures contract to establish a market position
and who has not yet closed out this position through an offsetting procedure.
The opposite of short.
Long cash
You own and plan to
sell a commodity.
Long hedge
The purchase of a futures
contract in anticipation of an actual purchase in the cash market. Used
by processors or exporters as protection against an advance in the cash
price. See Hedge.
Lot
The term used to describe
a designated number of contracts, e.g., a 5 lot purchase. Also called
"cars."
Margin
See Performance bond.
Maintenance
performance bond
A sum, usually smaller
than the initial performance bond, which must remain on deposit in the
customer's account for any position. A drop in funds below this level
requires a deposit back to initial performance bond levels. Previously
referred to as maintenance margin. See Performance bond call.
Market-if-touched
(MIT)
An price order that
becomes a market order when the market trades at a specified price at
least once.
Market-on-close
(MOC)
A market order filled
during the close of a trading session.
Market order
An order filled immediately
at the best price available.
Mark-to-market
The daily adjustment
of performance bond accounts to reflect profits and losses.
Maximum price
fluctuation
The maximum amount
the contract price can change up or down during one trading session, as
stipulated by Exchange rules.
Minimum price
fluctuation
The smallest increment
of price movement possible in trading a given contract, often referred
to as a tick.
Moving averages
A type of technical analysis using the averages of settlement prices.
Moving average
chart
A chart recording moving
averages (3-day, 10-day, etc.) of market prices.
National Futures
Association (NFA)
A self-regulatory organization
for the commodity futures industry comprised of firms and individuals
that conduct business with the public. Overseen by the CFTC
Nearby
The nearest active
trading month of a futures or options on futures contract. Also referred
to as the lead month.
Non-serial
options
Options for months
for which there are existing futures contracts of the same months.
Not-held (NH)
A discretionary note
on an order telling the floor broker that he or she won't be held accountable
if the trade is executed outside the requirements of the order. Gives
the broker discretion on getting the order filled.
Offer
Indicates a willingness
to sell a futures contract at a given price.
Offset
Selling if one
has bought, or buying if one has sold, a futures or options on futures
contract.
Offsetting
a hedge
For a short hedger,
to buy back futures and sell a commodity. For a long hedger, to sell back
futures and buy a commodity.
Offsetting
a long option
Offset a put by selling
a put with the same strike price. Offset a call by selling a call with
the same strike price.
Opening
The beginning of the
trading session.
Opening range
The range of prices
at which the first bids and offers were made or first transactions were
completed. Must be initiated by at least one trade.
Open interest
Total number of futures
or options on futures contracts that have not yet been offset or fulfilled
for delivery.
Open order
See Good-til-canceled.
Open outcry
The method of trading
publicly so that each trader has a fair chance to buy or sell.
Option
The right, but not
the obligation, to sell or buy the underlying (in this case, a futures
contract) at a specified price within a specified time.
Option assignment
The random selection
of an option writer to take a futures position when an option is exercised.
Option buyer
One who purchases an
option and pays a premium.
Option seller
One who sells an option
and receives a premium.
Order-cancels-other
(OCO)
An order that includes
two orders, one of which cancels the other when filled. Also referred
to as one-cancels-other.
Out-of-the-money
An option with no intrinsic
value. A call option with a strike price greater than the underlying futures
price. A put option with a strike price less than the underlying futures
price.
Out-trades
A situation that results
when there is some confusion or error on a trade - for example, when both
traders think they were buying.
Overbought/oversold
A technical opinion
of a market which has risen/fallen too much in relation to underlying
fundamental factors.
Performance
bond
Funds that must be
deposited by a customer with his or her broker, by a broker with a clearing
member or by a clearing member with the Clearing House. The performance
bond helps to ensure the financial integrity of brokers, clearing members
and the Exchange as a whole. Previously referred to as margin.
Performance
bond call
A demand for additional
funds to bring the customer's account back up to the initial performance
bond level whenever adverse price movement has caused the account to go
below the maintenance. Previously referred to as a margin call. See Maintenance
performance bond.
Point and
figure chart
A graph of prices charted
with x's for price increases and o's for price decreases, used by the
chartist for buy and sell signals.
Position
An interest in the market, either long or short, in the form of open contracts.
See Open interest.
Position trader
A trader who takes
a position in the market and might hold that position over a long period
of time.
Premium
The amount agreed upon
between the buyer and seller for the purchase or sale of a futures option
- the buyer pays the premium and the seller receives the premium. The
excess of one futures contract price over that of another or over the
cash market price.
Price order
An order to sell or
buy at a certain price or better.
Pure hedger
A person who places
a hedge to lock in a price for a commodity. He or she offsets the hedge
and transacts in the cash market simultaneously.
Put breakeven
See Breakeven.
Put option
An option granting
the right, but not the obligation, to sell a futures contract at the stated
price prior to the expiration of the option.
Put profit/loss
For a long put, equal
to the put value minus the premium. For a short put, equal to the premium
minus the put value.
Put value
At expiration, equal
to the strike price minus the futures price.
Rally
An upward movement
of prices following a decline. The opposite of a reaction.
Range
The high and low prices
or high and low bids and offers recorded during a specified time.
Retracement
A price move in the
opposite direction of a recent trend.
Registered
representative
A person employed by,
and soliciting business for, a commission house or futures commission
merchant.
Resistance
line
A price level above
which prices tend not to rise due to selling pressure.
Round-turn
See Commission.
Runaway gap
A gap in prices after
a trend has begun that signals the halfway point of a market move.
Scalp
To trade for small
gains. Scalping normally involves establishing and liquidating a position
quickly, usually within the same day, hour or even just a few minutes.
Selective
hedger
A person who hedges
only when he or she believes that prices are likely to move against him
or her.
Selling climax
An extraordinarily
high volume occurring suddenly in a downtrend signaling the end of the
trend.
Serial options
Options for months
for which there are no futures contracts. The underlying futures contract
for a serial option month would be the next nearby futures contract.
Settlement
price
A figure determined
by the closing range that is used to calculate gains and losses in futures
market accounts, performance bond calls and invoice prices for deliveries.
See Closing range.
Short
One who has sold a
futures contract to establish a market position and who has not yet closed
out this position through an offsetting procedure. The opposite of long.
Short cash
Describes a trader
who needs and plans to buy a commodity.
Short hedge
The sale of a futures
contract in anticipation of a later cash market sale. Used to eliminate
or lessen the possible decline in value of ownership of an approximately
equal amount of the cash financial instrument or physical commodity. See
Hedge.
Sideways trend
Seen in a bar chart
when prices tend not to go above or below a certain range of levels.
Speculator
One who attempts to
anticipate price changes and, through buying and selling futures contracts,
aims to make profits. Does not use the futures market in connection with
the production, processing, marketing or handling of a product. The speculator
has no interest in taking delivery.
Spot Price
See Cash price.
Spread
The price difference
between two contracts. Holding a long and a short position in two related
futures or options on futures contracts, with the objective of profiting
from a changing price relationship.
Spread order
An order that indicates
the purchase and sale of futures contracts simultaneously.
Spread trade
The simultaneous purchase
and sale of futures contracts for the same commodity or instrument for
delivery in different months or in different but related markets. A spreader
is not concerned with the direction in which the market moves, but only
with the difference between the prices of each contract.
Stop close
only order
A stop order that is
executed only during the closing range of the trading session.
Stop limit
order
An order that becomes
a limit order only when the market trades at a specified price.
Stop order
An order that becomes
a market order only when the market trades at a specified price.
Stop with
a price limit
A stop order with a
specified worst price at which the order can be filled.
Storage gain
The selling price received
after storage minus the previous harvest market price.
Straddle
The purchase of a put
and a call, in which the options have the same expiration and same strike
price, called a long straddle. Also, the sale of both a put and a call
in which the options have the same expiration and same strike price, called
a short straddle.
Strangle
The purchase of a put
and a call, in which the options have the same expiration and the put
strike is lower than the call strike, called a long strangle. Also the
sale of a put and a call, in which the options have the same expiration
and the put strike is lower than the call strike, call a short strangle.
Strike price
The price at
which the option buyer may purchase or sell the underlying futures contract
upon exercise. See Exercise price.
Supply
The quantity of a commodity
that producers are willing to provide to the market at a given price.
Symmetrical
triangles
A price formation that
can either signal a reversal or a continuation of price movement.
Synthetic
futures
A combination of a
put and a call with the same strike price, in which both are bullish,
called synthetic long futures. Also, a combination of a put and a call
with the same strike price, in which both are bearish, called synthetic
short futures.
Synthetic
call option
A combination of a
long futures contract and a long put, called a synthetic long call. Also,
a combination of a short futures contract and a short put, called a synthetic
short call.
Synthetic
option
A combination of a
futures contract and an option, in which one is bullish and one is bearish.
Synthetic
put option
A combination of a
short futures contract and a long call, called a synthetic long put. Also,
a combination of a long futures contract and a short call, called a synthetic
short put.
Target price
An expected selling
or buying price. For long and short hedges with futures: Futures Price
+ Expected Basis. For puts: Futures Price - Premium + Expected Basis.
For calls: Futures Price + Premium + Expected Basis.
Technical
analysis
The study of historical
price patterns to help forecast futures prices.
Theta
The measure of the
change in an option's premium given a change in the option's time until
expiration. Equal to the change in the option's premium divided by the
change in time to expiration.
Tick
Refers to a change
in price, either up or down. See Minimum price fluctuation.
Time value
The amount by which
an option's premium exceeds the intrinsic value of the option. Usually
relative to the time left to expiration.
Trader
A member of the exchange
who buys and sells futures and options on the floor of the exchange. See
Day trader, Floor broker, Position trader and Scalper.
Trend
The general direction
of the market.
Uptrend
A price trend characterized
by a series of higher highs and higher lows.
Vega
The measure of the
change in an option's premium for a 1% change in the volatility of the
underlying futures contract. Equal to the change in premium divided by
1% change in volatility.
Vertical spread
The purchase of a call
(put) and the sale of a call (put), where the options have the same expiration
and different strike prices.
Volatility
A annualized measure
of the fluctuation in the price of a futures contract. Historical volatility
is the actual measure of futures price movement from the past. Implied
volatility is a measure of what the market implies it is, as reflected
in the option's price.
Volume
The number of
transactions in futures or options on futures made during a specified
period of time.
With discretion
(DISC)
A discretionary note on an order telling the floor broker to use his or
her own discretion in filling the order.
Writer
An individual who sells
an option.