Futures Glossary 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.