learn to trade futures

Trading futures and options on futures involves a substantial amount of risk. Accordingly, Carley Garner and DeCarley Trading, have allocated substantial resources to help people to learn to trade futures.  After all, an educated brokerage client is a better client.  

Years of commodity market experience as futures brokers has contributed to the cause; we hope you enjoy these articles focused on trading in futures, option trading, and commodity market analysis. 

  • Figuring P&L in Commodities: It All Makes Cents

    One of the most frustrating aspects of trading commodities is getting comfortable with how each futures and options contract is quoted, what the point value or multiplier of each contract is, and most importantly how to calculate the profit, loss, and risk of a trade.

    Calculate commodity futures profit Each commodity futures contract is standardized, but in comparison to those with differing underlying assets they are often worlds apart. This can be extremely overwhelming for a new futures trader; particularly because stock traders enjoy the simplicity of consistent math regardless of the product being traded. I hope that the following explanations, and my years of experience as a commodity broker, help to shorten your learning curve. Additionally, I hope this article provides you with a good base of information to begin your journey in the challenging trading arena known as commodity options and futures.

    Unfortunately, until recently there hadn't been much in the way of uniformity in the commodity industry. Today, the Chicago Mercantile Exchange Group (CME Group) owns and operates most U.S. futures exchanges, but it wasn’t always that way. Early on, there were a handful of major domestic futures exchanges working completely independent of each other. Each of the exchange had differing rules and procedures; further each commodity listed on those exchanges had, and still have, various contract sizes and specifications. As a result, the point value and quoting format varies widely. For example, some commodities are referred to in fractions and others in decimals. Some decimals depict the difference between dollars and cents, others between cents and fractions of a cent. The merger of the Chicago Board of Trade, the Chicago Mercantile Exchange, and the New York Mercantile Exchange was a big step in bringing some congruency but, regrettably, reading and calculating commodity prices will never become easier.

    Reading and Calculating Commodity Prices

    Quoting Grain Futures

    The grain complex is perhaps the easiest to remember when trading in futures simply because four of the major contracts included are similarly quoted. Wheat,wheat futures corn, soybeans and oats are all priced in dollars and cents. This is true for both futures and the corresponding option contracts. If you are proficient in adding and subtracting fractions, these contracts should be a breeze; if not it may take you a while to become familiar enough with the pricing method to begin trading.

    Each of the grain futures contracts listed above are quoted in fractions using eight as a denominator. In other words, they are referred to in eighths of a cent. Because eight will always be the denominator the fractions are not reduced. The minimum tick for these contracts in the futures market is a quarter of a cent or 2/8ths. Thus, if corn was trading at $4.15 1/4 (four dollars and fifteen and a quarter cents) the price would be displayed on a quote board as simply 415'2. The two represents the un-reduced fraction 2/8. If corn futures ticked lower, the new price would be 415, or $4.15. It cannot trade at 415’1 because the minimum tick is a quarter of a cent.

    With this information, you have probably realized that a half of a cent is denoted by 4/8ths and three quarters of a cent would be displayed as 6/8ths or simply 6. In other words, if wheat was trading at $5.70 3/4 it would be displayed on a quote board or price ticker as 570'6. Likewise, $5.70 1/2 would be listed as 570'4. If fractions aren't your thing, you can avoid using them in your calculations by simply replacing the fraction with .25, .50 and .75 respectively.



    Calculating Profit and Loss in Grain Futures (Corn, Wheat, Soybeans)

    Each penny of movement in these grain futures will result in a profit or loss for the trader in the amount of $50. To illustrate, being long corn futures from $4.00 with the current futures price at $4.01 the trade is profitable by exactly $50. To expand on this idea, the minimum tick of a quarter of a cent (2/8ths) results in a profit or loss of $12.50. Once you are armed with this knowledge, computing profit, loss and risk in terms of actual dollars in your trading account is relatively simple.

    A trader long soybeans from 901'4 ($901 1/2) liquidates the position at 926'6 to net a profit of $1,262.50 before considering commissions and exchange fees. This is figured by subtracting 901'4 from 926'6 and multiplying that number by $50.

    926'6 - 901'4 = 25'2

    25'2 x $50 = $1,262.50 (minus commissions and fees)

    The Odd Couple of Soybean Futures (Soybean Meal, and Soybean Oil)

    The less talked about soybean contracts are the byproducts of the beans themselves. Soybeans are crushed to extract oil (soybean oil), what is left is a substance known soybean meal. Soybean oil can be found in many of the foods that you consume on a daily basis while soy meal is most often used as animal feed.

    Soybean Meal Futures

    While both of these products are derived from the same bean, in terms of futures trading they have few similarities. Soybean meal is quoted in dollars and cents per ton based on a contract size of 100 ton. To clarify, if soymeal futures are trading at 390.50 this is referring to three hundred ninety dollars and fifty cents per ton or $390.50. If the market drops by 30 cents (sometimes referred to as points) the new price would be 390.20. Each dime in price movement represents a $10 profit or loss per contract. Thus, if a trader sells soymeal futures at 395.20 and buys the contract back at 390.10 he realizes a profit of $510 per contract. This is calculated by subtracting the purchase price from the sale price and multiplying it by $100. This makes sense because if each dime in the commodity price is equivalent to $10 in your trading account, then each $1 change in the commodity price will represent a profit or loss of $100 before considering transaction costs.

    395.20 - 390.10 = 5.10

    5.10 x $100 = $510 (minus commissions and fees)

    Soybean Oil Futures

    Soybean oil futures trade in contracts of 60,000 pounds and are quoted in cents per pound. If you see a price of 38.20 it is actually referring to $0.3820 or 38.20 cents per pound. If the daily change was a positive .10, this represents a tenth of a cent price appreciation. Each 1/100th of a cent is worth $6 to the trader; thus each full handle or cent is equivalent to a profit or loss of $600 in the futures market. For example, if a trader went long soybean oil futures from 37.00 and was forced to sell the position at 36.20 at a loss, the total damage to the trading account of the speculator would have been $480. This is figured by subtracting the purchase price from the sale price and then multiplying by $6.

    37.00 - 36.20 = .80

    80 x $6 = $480 (minus commission and fees)


    livestock futuresLivestock Futures (The Meats)

    The complex known as "the meats" consists of feeder cattle, live cattle and lean hogs. Newer commodity traders are sometimes disappointed to learn the infamous pork belly futures contracts have been delisted from the exchange. Nevertheless, as an experienced futures broker I’m confident the trading community is better off without a futures contract written with pork bellies as the underlying asset. Prior to their delisting from exchange offered products, pork belly futures were thinly traded, involved wide bid/ask spreads, excessive volatility, and left countless traders maimed.

    Each of the livestock futures are quoted in cents per pound and there are one hundred points to each cent. With the exception of feeder cattle which have a point value of $5, the meats have a point value of $4. Therefore, a penny move (100 points) would be equivalent to $400 in profit or loss in live cattle and lean hogs. An equivalent move in feeder cattle would yield a profit or loss of $500.

    The meat futures contracts are commonly quoted with decimals which causes confusion. Don't assume because there is a decimal in the quote that it is meant to depict dollars and cents. The digits beyond the decimal point are referring to the fraction of a penny in which the price is trading. For example, if feeder cattle futures are trading at 210.90 this is equivalent to $2.10 and 9/10ths of a cent.

    Let's look at an example on how profit and loss would be calculated when trading live cattle futures. A trader long live cattle from 199.30 gets filled on a limit order working to sell at 202.40. This trade was profitable by 3.1 cents or $1,240 and can be calculated subtracting the entry price from the sales price and multiplying the difference by the multiplier. In the case of live cattle it is $4 a point or $400 per penny.

    202.40 - 199.30 = 3.10

    3.10 x $4 = $1,240 (before commissions and fees)




    Foods and Fibers (The Softs)

    Coffee, orange juice, cocoa and sugar all fall into a commodity futures category often referred to as the "softs". With the exception of cocoa, each of these futures contracts are quoted in cents per pound. Accordingly, although the multiplier will be different, the methodology in figuring out profit, loss and risk on a trade will be very similar to that of the meats.

    Cocoa Futures

    Cocoa, on the other hand is quoted in even dollar amounts per ton; prices are not broken down into cents. In other words, if cocoa is trading at 3100, it is actually going for three thousand one hundred dollars per ton. There are ten tons in a contract, so multiply by ten or add a zero to get the true dollar amount. If the market closed higher 14 ticks in a trading session, a trader would have either made or lost $140.

    Coffee Futures

    Coffee futures trade in contracts of 37,500 pounds making each penny of movement worth $375 to the trader. For example, if prices coffee futures smallmove from 130.00 to 131.00 a trader would have made or lost $375 before considering transaction costs. Similar to livestock futures, the decimal point isn't meant to separate dollars from cents it is a way of breaking each penny into fractions of a penny. Thus, if the price rises from 130.50 to 131.00 it has appreciated by half of a cent which is equivalent to $187.50 per contract to a commodity futures trader.

    Orange Juice Futures

    An orange juice contract represents 15,000 pounds of the underlying product. Therefore, each cent of price movement results in a profit or loss of $150 to a trader. Like meat futures and coffee, orange juice is quoted in cents per pound with a decimal that simply represents a fraction of a cent. A tcopprader long orange juice from 120.00 with the current market price at 118.50 has an unrealized loss of 1.5 cents or $225 (1.5 x $150).

    Sugar Futures

    Trading Sugar FuturesSugar #11 futures (not Sugar #14 futures) are traded based on a contract size of 112,000 pounds. With that said, each tick in sugar is worth $11.20 to the trader and each full handle of price movement (or penny) is equivalent to $1,120. Once again, don't mistake the decimal for separation of dollars and cents. If sugar is trading at 12.20 cents per pound it will be displayed by a quote service as 12.20. A trader long from 11.95 would be profitable at 12.20 by .25 cents, or $280, figured by multiplying the difference between the current price (12.20) and the purchase price (11.95) by the point value ($11.20).

    Cotton Futures

    Cotton isn't a food, it is a fiber. Nonetheless it is most often grouped with the softs (sugar, cocoa, orange juice and coffee futures) due to the fact that it trades on the same exchange (Intercontinental Exchange, or ICE). Cotton futures trade in 50,000 pound contracts and are quoted in cents per pound; again, the decimal point isn't intended to separate dollars and cents. Rather it separates cents from fractions of a cent. In other words, if cotton is trading at 68.50 it is read as 68 1/2 cents. Due to the contract size, each tick of price movement is worth $5 to a trader; therefore if a speculator sells cotton at 65.40 and is stopped out with a loss at 67.30 the total amount of the damage would be 1.9 cents or $950 (190 points x $5).

    Lumber Futures

    Lumber futures are not traded on ICE with the other softs, but are often referred to in the same category. For reasons unknown, lumber futures attract beginning traders. Perhaps it is because it is the epitome of the definition of a commodity due to its widespread usage. Nonetheless, it is a sparsely traded contract by speculators and until liquidity improves I don't necessarily recommend trading it. Prior to the Chicago Mercantile exchange eliminating open outcry futures trading pits, I can recall walking by the barely recognizable lumber futures trading pit. There were a total of three market makers passing the time by reading a newspaper. As a speculator, it is never a good idea to trade in a market in which your order will be one of a handful of fills in the entire trading day.

    If you do insist on trading lumber futures you must be willing to accept wide bid/ask spreads and a considerable amount of slippage getting in and getting out of your position. The contract size for the lumber futures contract is 110,000 board feet and it is quoted in dollars and cents. Accordingly each tick of price movement represents $11. In this case, the decimal is used in its usual context. If the market is trading at 246.80, it is interpreted as $246.80.


    Precious Metals Futures

    Gold, Platinum and Palladium Futures

    gold futuresGold, platinum and palladium futures are quoted just as they appear, the decimal included in the quotes are intended to separate dollars and cents. The numbers to the left of the decimal are dollars and the numbers to the right are cents. In other words, a point in these metals contracts is synonymous with a cent. For example, if gold is trading at $1130.20 and rallies 60 cents the price will be 1130.80, or simply $1130.80. Platinum and palladium are treated the same; there are no surprises here. However, their point values do differ. Palladium has an equivalent point value as gold at $100 per dollar of price movement, but the point value and contract size of platinum is half of that of gold and palladium. This is because of their futures contract size; a gold futures contract, as well as palladium futures, represent 100 ounces of the underlying commodity, but platinum is only 50 ounces.

    In regards to gold futures, each penny of price movement results in a profit or loss of $10 to the trader. Therefore, each full dollar movement in price represents $100 of profit or loss. Accordingly, if gold rallies from $1149.20 to $1156.80 a long trader would have made $7.60 or $760 and a short trader would have lost that amount (not considering commissions and fees).

    1156.80 - 1149.20 = 7.60

    7.60 x $100 = $760 (minus commissions and fees)

    Silver Futures

    The manner in which silver futures are quoted is more similar to grains such as corn and wheat than it is the other precious metals. A silver futuressilver contract represents 5,000 ounces of the underlying commodity creating a cent value of $50; for every penny that the futures market moves a trader will make or lose $50. Likewise, silver trades in dollars and fractions of a cent. If the price is quoted as 16.345 it should be read as $16.34 1/2. Please note that the traditional version of the silver contract traded on the COMEX division of the CME Group trades in halves of a cent, but there are mini versions of silver futures that trade in tenths of a cent, such as 1634.1 or sixteen dollars and thirty four and one tenth of a cent.

    Calculating profit and loss in silver futures is identical to doing so in corn, wheat or soybean futures. If you sell silver at 13.450 ($13.45) and are stopped out at 1362.5 ($13.62 1/2) you would have lost 17.5 cents or $875 ($50 x 17.5).

    Copper Futures

    Unlike the other metals which are referred to in terms of cents per ounce, copper futures are quoted in cents per pound. The contract size is 25,000 pounds making the multiplier $250 for a penny move. Simply put, if copper rises or falls by one cent a futures trader would make or lose $250. This makes sense because if the price of copper goes up by 1 penny you would make 25,000 pennies on a long futures position. Also unlike gold futures, copper prices trade in fractions of a cent. If you see copper quoted at 3.055 it is trading at $3.05 1/2. Likewise, if copper rallies from this price to 3.450, it represents a gain of 39.5 cents or $9,875 ($250 x 39.5) per contract. This sounds great if you happened to be long, but a short trader during this move likely lost a lot of sleep. There is a mini version of copper futures, which is probably more appropriate to most commodity traders due to it’s reduced contract size of 12,500 pounds.


    Energy Futures

    crude oil futuresCrude Oil Futures

    Crude oil is one of the most talked about commodities but is also one of the most challenging of the futures markets to speculate. WTI (West Texas Intermediate) Light sweet crude (not to be confused with Brent crude oil) is quoted in dollars per barrel. From a commodity trading standpoint, it is relatively simple to calculate profit, loss, and risk in crude oil futures because it is quoted in dollars and cents, as we are accustomed to in everyday life. The contract size is 1,000 barrels, so each penny of price movement in crude represents $10 of risk to a commodity trader.

    A price quote of 65.00 is just as it appears, $65.00 per barrel of crude. A drop in price from 65.00 to 63.00 is equivalent to a $2,000 profit or loss for a futures trader. Remember, each penny is worth $10 to a trader and a $2 move in price is 200 cents.

    Heating Oil Futures

    Heating oil futures and unleaded gasoline are much more complicated to figure. Both are quoted in cents per gallon, similar to how it is displayed to you at a gas station pump. Consequently, in both cases the decimal point separates the dollars from the cents and each of them trade in fractions of a cent. The contract size for each is 42,000 gallons, so each point in price movement is worth $4.20 cents to a futures trader and each penny (100 points) is worth $420. For example, if heating oil futures are trading at 2.1060 ($2.10 6/10) and rallies to a price of 2.2140 ($4.21 4/10) the futures contract has gained 10.8 cents or $4,536 (10.8 x $420). By this example you can see how easily money can be made or lost in the futures market. A price move of less than 11 cents could result in a profit or loss of several thousand dollars.

    Natural Gas Futures

    Natural gas futures are quoted in BTU's or British Thermal Units which is a measurement of heat and has a contract size of 10,000 mmBTU or million BTU's. Each tick of price movement in this contract is valued at $10 and there are 1000 ticks in a dollar of price movement. Thus, for every dollar move in the natural gas futures market, the value of the contract appreciates or depreciates by $10,000. To illustrate, if the market rallies from 3.305 or $3.30 1/2 to 4.305 a trader would have made or lost $10,000 on one futures contract. This might be enough to deter you from this market, unless of course you have deep pockets and substantial risk tolerance.


    Currency Futures

    Currency futures are listed on the Chicago Mercantile Exchange and are, for the most part, traded in "American terms". This simply

    currency futures

     means that the currency prices listed in the futures market represent the dollar price of each foreign currency. In order to understand the point of view of the futures price ask yourself; "How much of our currency does it take to buy one theirs?"

    If the Euro is trading at 1.1639, it takes $1.16 39/100 U.S. greenbacks to purchase one Euro. The value of one futures contract is 125,000 Euro so each tick higher or lower changes the price of the contract by $12.50 and translates into a profit or loss to the trader in that amount. Like the Euro futures contract, the majority of currency futures have a tick value of $12.50; others that share this characteristic are the Swiss Franc, and the Japanese Yen futures contract. The Australian Dollar and the Canadian Dollar both have a tick value of $10 and the British Pound fluctuates in ticks of $6.25. Once you know the tick value of each of these contracts, it is easy to compute the dollar amount of risk, profit and loss. For example, a trader that is long the Euro from 1.1239 and liquidates the position at 1.1432 would be profitable by 193 ticks or $2,412.50 (193 x $12.50).

  • Financial Futures Report Archives

    the financial futures report


    The Financial Futures Report is a commodity trading newsletter focused on the e-mini S&P futures, the 30-year bond futures market, and the 10-year note futures.  

    The author, Carley Garner, is an experienced commodity broker with plenty of stories and insight to share.  Garner keys off of her decade-plus experience as a futures broker to help readers navigate the options and futures markets.  The Financial Futures Report contains general stock index futures and Treasury market commentary, but it also details trading ideas (primarily option trading strategies), technical analysis including support and resistance levels, and commodity trader chatter. 

    This publication is offered exclusively to DeCarley Trading commodity brokerage clients, but can be obtained temporarily via a trial.  

  • FOMC and option expiration on deck, back and filling in ES futures?

    Heavy commodities and light economic data weigh on stocks

    Two consecutive days of sharp crude oil declines reminded traders of the chaos energy markets inflict on the financial markets. As a result, the e-mini S&P suffered moderate losses in overnight trade. However, it was weak economic data that kept prices under pressure throughout the session.

    February retail sales came in at a a negative .1% for both the headline number and ex-auto. Although this was an improvement from January, it is hardly reason to go out and buy stocks. Similarly, the Empire Manufacturing data improved markedly from last month to a positive 0.6, but simply posting a slightly positive number isn't enough to get investors excited. Today's PPI data, reported a decrease in prices at the producer level of .2%. Thus, last month's hint at inflation was dissolved.

    Tomorrow we'll hear about the latest data on consumer prices and housing starts, but I'm not sure it will matter to the market. All eyes are on the FOMC interest rate decision, which will be released at 2:00 Eastern.

  • FREE Futures and Options Trading Newsletters

    The missing piece to the puzzle?


    As commodity brokers, we take pride in offering free futures and options trading newsletters to DeCarley Trading clients. Our goal is to keep both futures, and options, traders on top of current events and market opportunities, while ensuring they fully understand the risks and rewards of commodity trading.

    Sign up to receive a free trial of our commodity trading newsletters delivered directly to your in-box. Each newsletter contains an honest and fresh perspective of the futures markets, along with actionable trading recommendations for futures and options traders.

  • Futures and Options Glossary

    Courtesy of the CFTC (Commodity Futures Trading Commission) this is the most extensive commodity market glossary that we have found, enjoy. 


  • Futures and Options Glossary A - B


    Abandon: To elect not to exercise or offset a long option position.

    Accommodation Trading: Non-competitive trading entered into by a trader, usually to assist another with illegal trades.

    Actuals: The physical or cash commodity, as distinguished from a futures contract. See Cash and Spot Commodity.

    Agency Bond: A debt security issued by a government-sponsored enterprise such as Fannie Mae or Freddie Mac, designed to resemble a U.S. Treasury bond.

    Agency Note: A debt security issued by a government-sponsored enterprise such as Fannie Mae or Freddie Mac, designed to resemble a U.S. Treasury note.

    Aggregation: The principle under which all futures positions owned or controlled by one trader (or group of traders acting in concert) are combined to determine reporting status and compliance with speculative position limits.

    Agricultural Trade Option Merchant: Any person that is in the business of soliciting or entering option transactions involving an enumerated agricultural commodity that are not conducted or executed on or subject to the rules of an exchange.

    Allowances: The discounts (premiums) allowed for grades or locations of a commodity lower (higher) than the par (or basis) grade or location specified in the futures contract. See Differentials.

    American Option: An option that can be exercised at any time prior to or on the expiration date. See European Option.

    Approved Delivery Facility: Any bank, stockyard, mill, storehouse, plant, elevator, or other depository that is authorized by an exchange for the delivery of commodities tendered on futures contracts.

    Arbitrage: A strategy involving the simultaneous purchase and sale of identical or equivalent commodity futures contracts or other instruments across two or more markets in order to benefit from a discrepancy in their price relationship. In a theoretical efficient market, there is a lack of opportunity for profitable arbitrage. See Spread.

    Arbitration: A process for settling disputes between parties that is less structured than court proceedings. The National Futures Association arbitration program provides a forum for resolving futures-related disputes between NFA members or between NFA members and customers. Other forums for customer complaints include the American Arbitration Association.

    Artificial Price: A futures price that has been affected by a manipulation and is thus higher or lower than it would have been if it reflected the forces of supply and demand.

    Asian Option: An exotic option whose payoff depends on the average price of the underlying asset during some portion of the life of the option.

    Ask: The price level of an offer, as in bid-ask spread.

    Assignable Contract: A contract that allows the holder to convey his rights to a third party. Exchange-traded contracts are not assignable.

    Assignment: Designation by a clearing organization of an option writer who will be required to buy (in the case of a put) or sell (in the case of a call) the underlying futures contract or security when an option has been exercised, especially if it has been exercised early.

    Associated Person (AP): An individual who solicits or accepts (other than in a clerical capacity) orders, discretionary accounts, or participation in a commodity pool, or supervises any individual so engaged, on behalf of a futures commission merchant, an introducing broker, a commodity trading advisor, a commodity pool operator, or an agricultural trade option merchant.

    At-the-Market: An order to buy or sell a futures contract at whatever price is obtainable when the order reaches the trading facility. See Market Order.

    At-the-Money: When an option's strike price is the same as the current trading price of the underlying commodity, the option is at-the-money.

    Auction Rate Security: A debt security, typically issued by a municipality, in which the yield is reset on each payment date via a Dutch auction.

    Audit Trail: The record of trading information identifying, for example, the brokers participating in each transaction, the firms clearing the trade, the terms and time or sequence of the trade, the order receipt and execution time, and, ultimately, and when applicable, the customers involved.

    Automatic Exercise: A provision in an option contract specifying that it will be exercised automatically on the expiration date if it is in-the-money by a specified amount, absent instructions to the contrary.


    Back Months: Futures delivery months other than the spot or front month (also called deferred months).

    Back Office: The department in a financial institution that processes and deals and handles delivery, settlement, and regulatory procedures.

    Back pricing: Fixing the price of a commodity for which the commitment to purchase has been made in advance. The buyer can fix the price relative to any monthly or periodic delivery using the futures markets.

    Back Spread: A delta-neutral ratio spread in which more options are bought than sold. A back spread will be profitable if volatility increases. See Delta.

    Backwardation: Market situation in which futures prices are progressively lower in the distant delivery months. For instance, if the gold quotation for January is $360.00 per ounce and that for June is $355.00 per ounce, the backwardation for five months against January is $5.00 per ounce. (Backwardation is the opposite of contango). See Inverted Market.

    Banker's Acceptance: A draft or bill of exchange accepted by a bank where the accepting institution guarantees payment. Used extensively in foreign trade transactions.

    Basis: The difference between the spot or cash price of a commodity and the price of the nearest futures contract for the same or a related commodity. Basis is usually computed in relation to the futures contract next to expire and may reflect different time periods, product forms, grades, or locations.

    Basis Grade: The grade of a commodity used as the standard or par grade of a futures contract.

    Basis Point: The measurement of a change in the yield of a debt security. One basis point equals 1/100 of one percent.

    Basis Quote: Offer or sale of a cash commodity in terms of the difference above or below a futures price (e.g., 10 cents over December corn).

    Basis Risk: The risk associated with an unexpected widening or narrowing of basis between the time a hedge position is established and the time that it is lifted.

    Basis Swap: A swap whose cash settlement price is calculated based on the basis between a futures contract and the spot price of the underlying commodity or a closely related commodity on a specified date.

    Bear: One who expects a decline in prices. The opposite of a bull. A news item is considered bearish if it is expected to result in lower prices.

    Bear Market: A market in which prices generally are declining over a period of months or years. Opposite of bull market.

    Bear Market Rally: A temporary rise in prices during a bear market. See Correction.

    Bear Spread: (1) A strategy involving the simultaneous purchase and sale of options of the same class and expiration date, but different strike prices. In a bear spread, the option that is purchased has a lower delta than the option that is bought. For example, in a call bear spread, the purchased option has a higher exercise price than the option that is sold. Also called bear vertical spread. (2) The simultaneous purchase and sale of two futures contracts in the same or related commodities with the intention of profiting from a decline in prices but at the same time limiting the potential loss if this expectation does not materialize. In agricultural products, this is accomplished by selling a nearby delivery and buying a deferred delivery

    Bear Vertical Spread: See Bear Spread.

    Beta (Beta Coefficient): A measure of the variability of rate of return or value of a stock or portfolio compared to that of the overall market, typically used as a measure of riskiness.

    Bid: An offer to buy a specific quantity of a commodity at a stated price.

    Bid-Ask Spread: The difference between the bid price and the ask or offer price.

    Blackboard Trading: The practice, no longer used, of buying and selling commodities by posting prices on a blackboard on a wall of a commodity exchange.

    Black-Scholes Model: An option pricing model initially developed by Fischer Black and Myron Scholes for securities options and later refined by Black for options on futures.

    Block Trade: A large transaction that is negotiated off a trading floor or facility and then executed on an exchange’s trading facility, as permitted under exchange rules. For more information, see CFTC Advisory: Alternative Execution, or Block Trading, Procedures for the Futures Industry.

    Board Order: See Market-if-Touched Order.

    Board of Trade: Any organized exchange or other trading facility for the trading of futures and/or option contracts.

    Boiler Room: An enterprise that often is operated out of inexpensive, low-rent quarters (hence the term "boiler room"), that uses high pressure sales tactics (generally over the telephone), and possibly false or misleading information to solicit generally unsophisticated investors.

    Booking the Basis: A forward pricing sales arrangement in which the cash price is determined either by the buyer or seller within a specified time. At that time, the previously-agreed basis is applied to the then-current futures quotation.

    Book Transfer: A series of accounting or bookkeeping entries used to settle a series of cash market transactions.

    Box Spread: An option position in which the owner establishes a long call and a short put at one strike price and a short call and a long put at another strike price, all of which are in the same contract month in the same commodity.

    Break: A rapid and sharp price decline.

    Broad-Based Security Index: Any index of securities that does not meet the legal definition of narrow-based security index.

    Broker: A person paid a fee or commission for executing buy or sell orders for a customer. In commodity futures trading, the term may refer to: (1) Floor broker, a person who actually executes orders on the trading floor of an exchange; (2) Account executive or associated person, the person who deals with customers in the offices of futures commission merchants; or (3) the futures commission merchant.

    Broker Association: Two or more persons with exchange trading privileges who (1) share responsibility for executing customer orders; (2) have access to each other's unfilled customer orders as a result of common employment or other types of relationships; or (3) share profits or losses associated with their brokerage or trading activity.

    Bucketing: Directly or indirectly taking the opposite side of a customer's order into a broker's own account or into an account in which a broker has an interest, without open and competitive execution of the order on an exchange. Also called trading against.

    Bucket Shop: A brokerage enterprise that “books" (i.e., takes the opposite side of) retail customer orders without actually having them executed on an exchange.

    Bull: One who expects a rise in prices. The opposite of bear. A news item is considered bullish if it is expected to result in higher prices.

    Bullion: Bars or ingots of precious metals, usually cast in standardized sizes.

    Bull Market: A market in which prices generally are rising over a period of months or years. Opposite of bear market.

    Bull Spread: (1) A strategy involving the simultaneous purchase and sale of options of the same class and expiration date but different strike prices. In a bull vertical spread, the purchased option has a higher delta than the option that is sold. For example, in a call bull spread, the purchased option has a lower exercise price than the sold option. Also called bull vertical spread. (2) The simultaneous purchase and sale of two futures contracts in the same or related commodities with the intention of profiting from a rise in prices but at the same time limiting the potential loss if this expectation is wrong. In agricultural commodities, this is accomplished by buying the nearby delivery and selling the deferred.

    Bull Vertical Spread: See Bull Spread.

    Buoyant: A market in which prices have a tendency to rise easily with a considerable show of strength.

    Bunched Order: A discretionary order entered on behalf of multiple customers.

    Butterfly Spread: A three-legged option spread in which each leg has the same expiration date but different strike prices. For example, a butterfly spread in soybean call options might consist of one long call at a $5.50 strike price, two short calls at a $6.00 strike price, and one long call at a $6.50 strike price.

    Buyer: A market participant who takes a long futures position or buys an option. An option buyer is also called a taker, holder, or owner.

    Buyer's Call: A purchase of a specified quantity of a specific grade of a commodity at a fixed number of points above or below a specified delivery month futures price with the buyer allowed a period of time to fix the price either by purchasing a futures contract for the account of the seller or telling the seller when he wishes to fix the price. See Seller’s Call.

    Buyer's Market: A condition of the market in which there is an abundance of goods available and hence buyers can afford to be selective and may be able to buy at less than the price that previously prevailed. See Seller's Market.

    Buying Hedge (or Long Hedge): Hedging transaction in which futures contracts are bought to protect against possible increases in the cost of commodities. See Hedging.

    Buy (or Sell) On Close: To buy (or sell) at the end of the trading session within the closing price range.

    Buy (or Sell) On Opening: To buy (or sell) at the beginning of a trading session within the open price range.

  • Futures and Options Glossary C - D


    C & F: "Cost and Freight" paid to a point of destination and included in the price quoted; same as C.A.F.

    Calendar Spread: (1) The purchase of one delivery month of a given futures contract and simultaneous sale of a different delivery month of the same futures contract; (2) the purchase of a put or call option and the simultaneous sale of the same type of option with typically the same strike price but a different expiration date. Also called a horizontal spread or time spread.

    Call Option: (1) An option contract giving the buyer the right but not the obligation to purchase a commodity or other asset or to enter into a long futures position; (2) a period at the opening and the close of some futures markets in which the price for each futures contract is established by auction; or (3) the requirement that a financial instrument be returned to the issuer prior to maturity, with principal and accrued interest paid off upon return. See Buyer’s Call, Seller’s Call.

    Call Around Market: A market, commonly used for options on futures on European exchanges, in which brokers contact each other outside of the exchange trading facility to arrange block trades.

    Call Cotton: Cotton bought or sold on call. See Buyer’s Call, Seller’s Call.

    Called: Another term for exercised when an option is a call. In the case of an option on a physical, the writer of a call must deliver the indicated underlying commodity when the option is exercised or called. In the case of an option on a futures contract, a futures position will be created that will require margin, unless the writer of the call has an offsetting position.

    Call Rule: An exchange regulation under which an official bid price for a cash commodity is competitively established at the close of each day's trading. It holds until the next opening of the exchange.

    Capping: Effecting transactions in an instrument underlying an option shortly before the option's expiration date to depress or prevent a rise in the price of the instrument so that previously written call options will expire worthless, thus protecting premiums previously received. See Pegging.

    Carrying Broker: An exchange member firm, usually a futures commission merchant, through whom another broker or customer elects to clear all or part of its trades.

    Carrying Charges: Cost of storing a physical commodity or holding a financial instrument over a period of time. These charges include insurance, storage, and interest on the deposited funds, as well as other incidental costs. It is a carrying charge market when there are higher futures prices for each successive contract maturity. If the carrying charge is adequate to reimburse the holder, it is called a "full charge." See Negative Carry, Positive Carry, and Contango.

    Cash Commodity: The physical or actual commodity as distinguished from the futures contract, sometimes called spot commodity or actuals.

    Cash Forward Sale: See Forward Contract.

    Cash Market: The market for the cash commodity (as contrasted to a futures contract) taking the form of: (1) an organized, self-regulated central market (e.g., a commodity exchange); (2) a decentralized over-the-counter market; or (3) a local organization, such as a grain elevator or meat processor, which provides a market for a small region.

    Cash Price: The price in the marketplace for actual cash or spot commodities to be delivered via customary market channels.

    Cash Settlement: A method of settling certain futures or option contracts whereby the seller (or short) pays the buyer (or long) the cash value of the commodity traded according to a procedure specified in the contract. Also called Financial Settlement, especially in energy derivatives.

    CCC: See Commodity Credit Corporation.

    CD: See Certificate of Deposit.

    CEA: Commodity Exchange Act or Commodity Exchange Authority.

    Certificate of Deposit (CD): A time deposit with a specific maturity evidenced by a certificate. Large denomination CDs are typically negotiable.

    CFTC: See Commodity Futures Trading Commission.

    CFO: Cancel Former Order.

    Certificated or Certified Stocks: Stocks of a commodity that have been inspected and found to be of a quality deliverable against futures contracts, stored at the delivery points designated as regular or acceptable for delivery by an exchange. In grain, called "stocks in deliverable position." See Deliverable Stocks.

    Changer: Formerly, a clearing member of both the Mid-America Commodity Exchange (MidAm) and another futures exchange who, for a fee, would assume the opposite side of a transaction on MidAm by taking a spread position between MidAm and the other futures exchange that traded an identical, but larger, contract. Through this service, the changer provided liquidity for MidAm and an economical mechanism for arbitrage between the two markets. MidAm was a subsidiary of the Chicago Board of Trade (CBOT). MidAm was closed by the CBOT in 2003 after all MidAm contracts were delisted on MidAm and relisted on the CBOT as Mini contracts. The CBOT still uses changers for former MidAm contracts that are traded on an open outcry platform.

    Charting: The use of graphs and charts in the technical analysis of futures markets to plot trends of price movements, average movements of price, volume of trading, and open interest.

    Chartist: Technical trader who reacts to signals derived from graphs of price movements.

    Cheapest-to-Deliver: Usually refers to the selection of a class of bonds or notes deliverable against an expiring bond or note futures contract. The bond or note that has the highest implied repo rate is considered cheapest to deliver.

    Chooser Option: An exotic option that is transacted in the present, but that at some specified future date is chosen to be either a put or a call option.

    Churning: Excessive trading of a discretionary account by a person with control over the account for the purpose of generating commissions while disregarding the interests of the customer.

    Circuit Breakers: A system of coordinated trading halts and/or price limits on equity markets and equity derivative markets designed to provide a cooling-off period during large, intraday market declines. The first known use of the term circuit breaker in this context was in the Report of the Presidential Task Force on Market Mechanisms (January 1988), which recommended that circuit breakers be adopted following the market break of October 1987.

    C.I.F: Cost, insurance, and freight paid to a point of destination and included in the price quoted.

    Class (of options): Options of the same type (i.e., either puts or calls, but not both) covering the same underlying futures contract or other asset (e.g., a March call with a strike price of 62 and a May call with a strike price of 58).

    Clearing: The procedure through which the clearing organization becomes the buyer to each seller of a futures contract or other derivative, and the seller to each buyer for clearing members.

    Clearing Association: See Clearing Organization.

    Clearing House: See Clearing Organization.

    Clearing Member: A member of a clearing organization. All trades of a non-clearing member must be processed and eventually settled through a clearing member.

    Clearing Organization: An entity through which futures and other derivative transactions are cleared and settled. It is also charged with assuring the proper conduct of each contract’s delivery procedures and the adequate financing of trading. A clearing organization may be a division of a particular exchange, an adjunct or affiliate thereof, or a freestanding entity. Also called a clearing house, multilateral clearing organization, or clearing association. See Derivatives Clearing Organization.

    Clearing Price: See Settlement Price.

    Close: The exchange-designated period at the end of the trading session during which all transactions are considered made "at the close." See Call.

    Closing-Out: Liquidating an existing long or short futures or option position with an equal and opposite transaction. Also known as Offset.

    Closing Price (or Range): The price (or price range) recorded during trading that takes place in the final period of a trading session’s activity that is officially designated as the "close."

    Combination: Puts and calls held either long or short with different strike prices and/or expirations. Types of combinations include straddles and strangles.

    Commercial: An entity involved in the production, processing, or merchandising of a commodity.

    Commercial Grain Stocks: Domestic grain in store in public and private elevators at important markets and grain afloat in vessels or barges in lake and seaboard ports.

    Commercial Paper: Short-term promissory notes issued in bearer form by large corporations, with maturities ranging from 5 to 270 days. Since the notes are unsecured, the commercial paper market generally is dominated by large corporations with impeccable credit ratings.

    Commission: (1) The charge made by a futures commission merchant for buying and selling futures contracts; or (2) the fee charged by a futures broker for the execution of an order. Note: when capitalized, the word Commission usually refers to the CFTC.

    Commitments of Traders Report (COT): A weekly report from the CFTC providing a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. Open interest is broken down by aggregate commercial, non-commercial, and non-reportable holdings.

    Commitments: See Open Interest.

    Commodity: A commodity, as defined in the Commodity Exchange Act, includes the agricultural commodities enumerated in Section 1a(4) of the Commodity Exchange Act, 7 USC 1a(4), and all other goods and articles, except onions as provided in Public Law 85-839 (7 USC 13-1), a 1958 law that banned futures trading in onions, and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in.

    Commodity Credit Corporation: A government-owned corporation established in 1933 to assist American agriculture. Major operations include price support programs, foreign sales, and export credit programs for agricultural commodities.

    Commodity Exchange Act: The Commodity Exchange Act, 7 USC 1, et seq., provides for the federal regulation of commodity futures and options trading. See Commodity Futures Modernization Act.

    Commodity Exchange Authority: A regulatory agency of the U.S. Department of Agriculture established to administer the Commodity Exchange Act prior to 1975. The Commodity Exchange Authority was the predecessor of the Commodity Futures Trading Commission.

    Commodity Exchange Commission: A commission consisting of the Secretary of Agriculture, Secretary of Commerce, and the Attorney General, responsible for administering the Commodity Exchange Act prior to 1975.

    Commodity Futures Modernization Act: The Commodity Futures Modernization Act of 2000 (CFMA), Pub. L. No. 106-554, 114 Stat. 2763, reauthorized the Commodity Futures Trading Commission for five years and overhauled the Commodity Exchange Act to create a flexible structure for the regulation of futures and options trading. Significantly, the CFMA codified an agreement between the CFTC and the Securities and Exchange Commission to repeal the 18-year-old ban on the trading of single stock futures.

    Commodity Futures Trading Commission (CFTC): The Federal regulatory agency established by the Commodity Futures Trading Act of 1974 to administer the Commodity Exchange Act.

    Commodity-Linked Bond: A bond in which payment to the investor is dependent to a certain extent on the price level of a commodity, such as crude oil, gold, or silver, at maturity.

    Commodity Option: An option on a commodity or a futures contract.

    Commodity Pool: An investment trust, syndicate, or similar form of enterprise operated for the purpose of trading commodity futures or option contracts. Typically thought of as an enterprise engaged in the business of investing the collective or “pooled” funds of multiple participants in trading commodity futures or options, where participants share in profits and losses on a pro rata basis.

    Commodity Pool Operator (CPO): A person engaged in a business similar to an investment trust or a syndicate and who solicits or accepts funds, securities, or property for the purpose of trading commodity futures contracts or commodity options. The commodity pool operator either itself makes trading decisions on behalf of the pool or engages a commodity trading advisor to do so.

    Commodity Price Index: Index or average, which may be weighted, of selected commodity prices, intended to be representative of the markets in general or a specific subset of commodities, e.g., grains or livestock.

    Commodity Trading Advisor (CTA): A person who, for pay, regularly engages in the business of advising others as to the value of commodity futures or options or the advisability of trading in commodity futures or options, or issues analyses or reports concerning commodity futures or options.

    Commodity Swap: A swap in which the payout to at least one counterparty is based on the price of a commodity or the level of a commodity index.

    Confirmation Statement: A statement sent by a futures commission merchant to a customer when a futures or options position has been initiated which typically shows the price and the number of contracts bought and sold. See P&S (Purchase and Sale Statement).

    Congestion: (1) A market situation in which shorts attempting to cover their positions are unable to find an adequate supply of contracts provided by longs willing to liquidate or by new sellers willing to enter the market, except at sharply higher prices (see Squeeze, Corner ); (2) in technical analysis, a period of time characterized by repetitious and limited price fluctuations.

    Consignment: A shipment made by a producer or dealer to an agent elsewhere with the understanding that the commodities in question will be cared for or sold at the highest obtainable price. Title to the merchandise shipped on consignment rests with the shipper until the goods are disposed of according to agreement.

    Contango: Market situation in which prices in succeeding delivery months are progressively higher than in the nearest delivery month; the opposite of backwardation.

    Contract: (1) A term of reference describing a unit of trading for a commodity future or option; (2) an agreement to buy or sell a specified commodity, detailing the amount and grade of the product and the date on which the contract will mature and become deliverable.

    Contract Grades: Those grades of a commodity that have been officially approved by an exchange as deliverable in settlement of a futures contract.

    Contract Market: A board of trade or exchange designated by the Commodity Futures Trading Commission to trade futures or options under the Commodity Exchange Act. A contract market can allow both institutional and retail participants and can list for trading futures contracts on any commodity, provided that each contract is not readily susceptible to manipulation. Also called designated contract market. See Derivatives Transaction Execution Facility.

    Contract Month: See Delivery Month.

    Contract Size: The actual amount of a commodity represented in a contract.

    Contract Unit: See Contract Size.

    Controlled Account: An account for which trading is directed by someone other than the owner. Also called a Managed Account or a Discretionary Account.

    Convergence: The tendency for prices of physicals and futures to approach one another, usually during the delivery month. Also called a "narrowing of the basis."

    Conversion: A position created by selling a call option, buying a put option, and buying the underlying instrument (for example, a futures contract), where the options have the same strike price and the same expiration. See Reverse Conversion.

    Conversion Factors: Numbers published by futures exchanges to determine invoice prices for debt instruments deliverable against bond or note futures contracts. A separate conversion factor is published for each deliverable instrument. Invoice price = Contract Size X Futures Settlement Price X Conversion Factor + Accrued Interest.

    Core Principle: A provision of the Commodity Exchange Act with which a contract market, derivatives transaction execution facility, or derivatives clearing organization must comply on an ongoing basis. There are 18 core principles for contract markets, 9 core principles for derivatives transaction execution facilities, and 14 core principles for derivatives clearing organizations.

    Corner: (1) Securing such relative control of a commodity that its price can be manipulated, that is, can be controlled by the creator of the corner; or (2) in the extreme situation, obtaining contracts requiring the delivery of more commodities than are available for delivery. See Squeeze, Congestion.

    Corn-Hog Ratio: See Feed Ratio.

    Correction: A temporary decline in prices during a bull market that partially reverses the previous rally. See Bear Market Rally.

    Cost of Tender: Total of various charges incurred when a commodity is certified and delivered on a futures contract.

    COT: See Commitments of Traders Report.

    Counterparty: The opposite party in a bilateral agreement, contract, or transaction, such as a swap. In the retail foreign exchange (or Forex) context, the party to which a retail customer sends its funds; lawfully, the party must be one of those listed in Section 2(c)(2)(B)(ii)(I)-(VI) of the Commodity Exchange Act.

    Counterparty Risk: The risk associated with the financial stability of the party entered into contract with. Forward contracts impose upon each party the risk that the counterparty will default, but futures contracts executed on a designated contract market are guaranteed against default by the clearing organization.

    Counter-Trend Trading: In technical analysis, the method by which a trader takes a position contrary to the current market direction in anticipation of a change in that direction.

    Coupon (Coupon Rate): A fixed dollar amount of interest payable per annum, stated as a percentage of principal value, usually payable in semiannual installments.

    Cover: (1) Purchasing futures to offset a short position (same as Short Covering); see Offset, Liquidation; (2) to have in hand the physical commodity when a short futures sale is made, or to acquire the commodity that might be deliverable on a short sale.

    Covered Option: A short call or put option position that is covered by the sale or purchase of the underlying futures contract or other underlying instrument. For example, in the case of options on futures contracts, a covered call is a short call position combined with a long futures position. A covered put is a short put position combined with a short futures position.

    Cox-Ross-Rubinstein Option Pricing Model: An option pricing model developed by John Cox, Stephen Ross, and Mark Rubinstein that can be adopted to include effects not included in the Black-Scholes Model (e.g., early exercise and price supports).

    CPO: See Commodity Pool Operator.

    Crack Spread: (1) In energy futures, the simultaneous purchase of crude oil futures and the sale of petroleum product futures to establish a refining margin. See Gross Processing Margin. (2) Calculation showing the theoretical market value of petroleum products that could be obtained from a barrel of crude after the oil is refined or cracked. This does not necessarily represent the refining margin because a barrel of crude yields varying amounts of petroleum products.

    Credit Default Option: A put option that makes a payoff in the event the issuer of a specified reference asset defaults. Also called default option.

    Credit Default Swap: A bilateral over-the-counter (OTC) contract in which the seller agrees to make a payment to the buyer in the event of a specified credit event in exchange for a fixed payment or series of fixed payments; the most common type of credit derivative; also called credit swap; similar to credit default option.

    Credit Derivative: An over-the-counter (OTC) derivative designed to assume or shift credit risk, that is, the risk of a credit event such as a default or bankruptcy of a borrower. For example, a lender might use a credit derivative to hedge the risk that a borrower might default or have its credit rating downgraded. Common credit derivatives include credit default options, credit default swaps, credit spread options, downgrade options, and total return swaps.

    Credit Event: An event such as a debt default or bankruptcy that will affect the payoff on a credit derivative, as defined in the derivative agreement.

    Credit Rating: A rating determined by a rating agency that indicates the agency’s opinion of the likelihood that a borrower such as a corporation or sovereign nation will be able to repay its debt. The rating agencies include Standard & Poor’s, Fitch, and Moody’s.

    Credit Spread: The difference between the yield on the debt securities of a particular corporate or sovereign borrower (or a class of borrowers with a specified credit rating) and the yield of similar maturity Treasury debt securities.

    Credit Spread Option: An option whose payoff is based on the credit spread between the debt of a particular borrower and similar maturity Treasury debt.

    Credit Swap: See Credit Default Swap.

    Crop Year: The time period from one harvest to the next, varying according to the commodity (e.g., July 1 to June 30 for wheat; September 1 to August 31 for soybeans).

    Cross-Hedge: Hedging a cash market position in a futures or option contract for a different but price-related commodity.

    Cross-Margining: A procedure for margining related securities, options, and futures contracts jointly when different clearing organizations clear each side of the position.

    Cross Rate: In foreign exchange, the price of one currency in terms of another currency in the market of a third country. For example, the exchange rate between Japanese yen and Euros would be considered a cross rate in the U.S. market.

    Cross Trading: Offsetting or noncompetitive match of the buy order of one customer against the sell order of another, a practice that is permissible only when executed in accordance with the Commodity Exchange Act, CFTC rules, and rules of the exchange.

    Crush Spread: In the soybean futures market, the simultaneous purchase of soybean futures and the sale of soybean meal and soybean oil futures to establish a processing margin. See Gross Processing Margin, Reverse Crush Spread.

    CTA: See Commodity Trading Advisor.

    CTI (Customer Type Indicator) Codes: These consist of four identifiers that describe transactions by the type of customer for which a trade is effected. The four codes are: (1) trading by a person who holds trading privileges for his or her own account or an account for which the person has discretion; (2) trading for a clearing member’s proprietary account; (3) trading for another person who holds trading privileges who is currently present on the trading floor or for an account controlled by such other person; and (4) trading for any other type of customer. Transaction data classified by the above codes is included in the trade register report produced by a clearing organization.

    Curb Trading: Trading by telephone or by other means that takes place after the official market has closed and that originally took place in the street on the curb outside the market. Under the Commodity Exchange Act and CFTC rules, curb trading is illegal. Also known as kerb trading.

    Currency Swap: A swap that involves the exchange of one currency (e.g., U.S. dollars) for another (e.g., Japanese yen) on a specified schedule.

    Current Delivery Month: See Spot Month.


    Daily Price Limit: The maximum price advance or decline from the previous day's settlement price permitted during one trading session, as fixed by the rules of an exchange.

    Day Ahead: See Next Day.

    Day Order: An order that expires automatically at the end of each day's trading session. There may be a day order with time contingency. For example, an "off at a specific time" order is an order that remains in force until the specified time during the session is reached. At such time, the order is automatically canceled.

    Day Trader: A trader, often a person with exchange trading privileges, who takes positions and then offsets them during the same trading session prior to the close of trading.

    DCM: Designated Contract Market.

    Dealer: An individual or firm that acts as a market maker in an instrument such as a security or foreign currency.

    Deck: The orders for purchase or sale of futures and option contracts held by a floor broker. Also referred to as an order book.

    Declaration Date: See Expiration Date.

    Declaration (of Options): See Exercise.

    Default: Failure to perform on a futures contract as required by exchange rules, such as failure to meet a margin call, or to make or take delivery.

    Default Option: See Credit Default Option.

    Deferred Futures: See Back Months.

    Deliverable Grades: See Contract Grades.

    Deliverable Stocks: Stocks of commodities located in exchange-approved storage for which receipts may be used in making delivery on futures contracts. In the cotton trade, the term refers to cotton certified for delivery. Also see Certificated or Certified Stocks.

    Deliverable Supply: The total supply of a commodity that meets the delivery specifications of a futures contract. See Economically Deliverable Supply.

    Delivery: The tender and receipt of the actual commodity, the cash value of the commodity, or of a delivery instrument covering the commodity (e.g., warehouse receipts or shipping certificates), used to settle a futures contract. See Notice of Delivery, Delivery Notice.

    Delivery, Current: Deliveries being made during a present month. Sometimes current delivery is used as a synonym for nearby delivery.

    Delivery Date: The date on which the commodity or instrument of delivery must be delivered to fulfill the terms of a contract.

    Delivery Instrument: A document used to effect delivery on a futures contract, such as a warehouse receipt or shipping certificate.

    Delivery Month: The specified month within which a futures contract matures and can be settled by delivery or the specified month in which the delivery period begins.

    Delivery, Nearby: The nearest traded month, the front month. In plural form, one of the nearer trading months.

    Delivery Notice: The written notice given by the seller of his intention to make delivery against an open short futures position on a particular date. This notice, delivered through the clearing organization, is separate and distinct from the warehouse receipt or other instrument that will be used to transfer title. Also called Notice of Intent to Deliver or Notice of Delivery.

    Delivery Option: A provision of a futures contract that provides the short with flexibility in regard to timing, location, quantity, or quality in the delivery process.

    Delivery Point: A location designated by a commodity exchange where stocks of a commodity represented by a futures contract may be delivered in fulfillment of the contract. Also called Location.

    Delivery Price: The price fixed by the clearing organization at which deliveries on futures are invoiced—generally the price at which the futures contract is settled when deliveries are made. Also called Invoice Price.

    Delta: The expected change in an option's price given a one-unit change in the price of the underlying futures contract or physical commodity. For example, an option with a delta of 0.5 would change $.50 when the underlying commodity moves $1.00.

    Delta Margining or Delta-Based Margining: An option margining system used by some exchanges that equates the changes in option premiums with the changes in the price of the underlying futures contract to determine risk factors upon which to base the margin requirements.

    Delta Neutral: Refers to a position involving options that is designed to have an overall delta of zero.

    Deposit: See Initial Margin.

    Depository Receipt: See Vault Receipt.

    Derivative: A financial instrument, traded on or off an exchange, the price of which is directly dependent upon (i.e., "derived from") the value of one or more underlying securities, equity indices, debt instruments, commodities, other derivative instruments, or any agreed upon pricing index or arrangement (e.g., the movement over time of the Consumer Price Index or freight rates). Derivatives involve the trading of rights or obligations based on the underlying product, but do not directly transfer property. They are used to hedge risk or to exchange a floating rate of return for fixed rate of return. Derivatives include futures, options, and swaps. For example, futures contracts are derivatives of the physical contract and options on futures are derivatives of futures contracts.

    Derivatives Clearing Organization: A clearing organization or similar entity that, in respect to a contract (1) enables each party to the contract to substitute, through novation or otherwise, the credit of the derivatives clearing organization for the credit of the parties; (2) arranges or provides, on a multilateral basis, for the settlement or netting of obligations resulting from such contracts; or (3) otherwise provides clearing services or arrangements that mutualize or transfer among participants in the derivatives clearing organization the credit risk arising from such contracts.

    Derivatives Transaction Execution Facility (DTEF): A board of trade that is registered with the CFTC as a DTEF. A DTEF is subject to fewer regulatory requirements than a contract market. To qualify as a DTEF, an exchange can only trade certain commodities (including excluded commodities and other commodities with very high levels of deliverable supply) and generally must exclude retail participants (retail participants may trade on DTEFs through futures commission merchants with adjusted net capital of at least $20 million or registered commodity trading advisors that direct trading for accounts containing total assets of at least $25 million). See Derivatives Transaction Execution Facilities.

    Designated Contract Market: See Contract Market.

    Designated Self-Regulatory Organization (DSRO): Self-regulatory organizations (i.e., the commodity exchanges and registered futures associations) must enforce minimum financial and reporting requirements for their members, among other responsibilities outlined in the CFTC's regulations. When a futures commission merchant (FCM) is a member of more than one SRO, the SROs may decide among themselves which of them will assume primary responsibility for these regulatory duties and, upon approval of the plan by the Commission, be appointed the "designated self-regulatory organization" for that FCM.

    Diagonal Spread: A spread between two call options or two put options with different strike prices and different expiration dates. See Horizontal Spread, Vertical Spread.

    Differentials: The discount (premium) allowed for grades or locations of a commodity lower (higher) than the par of basis grade or location specified in the futures contact. See Allowances.

    Directional Trading: Trading strategies designed to speculate on the direction of the underlying market, especially in contrast to volatility trading.

    Disclosure Document: A statement that must be provided to prospective customers that describes trading strategy, potential risk, commissions, fees, performance, and other relevant information.

    Discount: (1) The amount a price would be reduced to purchase a commodity of lesser grade; ( 2) sometimes used to refer to the price differences between futures of different delivery months, as in the phrase "July at a discount to May," indicating that the price for the July futures is lower than that of May.

    Discretionary Account: An arrangement by which the holder of an account gives written power of attorney to someone else, often a commodity trading advisor, to buy and sell without prior approval of the holder; often referred to as a "managed account" or controlled account.

    DRT ("Disregard Tape") or Not-Held Order: Absent any restrictions, a DRT (Not-Held Order) means any order giving the floor broker complete discretion over price and time in execution of an order, including discretion to execute all, some, or none of this order.

    Distant or Deferred Months: See Back Month.

    Dominant Future: That future having the largest amount of open interest.

    Double Hedging: As used by the CFTC, it implies a situation where a trader holds a long position in the futures market in excess of the speculative position limit as an offset to a fixed price sale, even though the trader has an ample supply of the commodity on hand to fill all sales commitments.

    DSRO: See Designated Self-Regulatory Organization.

    DTEF: See Derivatives Transaction Execution Facility.

    Dual Trading: Dual trading occurs when: (1) a floor broker executes customer orders and, on the same day, trades for his own account or an account in which he has an interest; or (2) a futures commission merchant carries customer accounts and also trades or permits its employees to trade in accounts in which it has a proprietary interest, also on the same trading day.

    Dutch Auction: An auction of a debt instrument (such as a Treasury note) in which all successful bidders receive the same yield (the lowest yield that results in the sale of the entire amount to be issued).

    Duration: A measure of a bond's price sensitivity to changes in interest rates.

  • Futures and Options Glossary E - G


    Ease Off: A minor and/or slow decline in the price of a market.

    ECN: Electronic Communications Network, frequently used for creating electronic stock or futures markets.

    Economically Deliverable Supply: That portion of the deliverable supply of a commodity that is in position for delivery against a futures contract, and is not otherwise unavailable for delivery. For example, Treasury bonds held by long-term investment funds are not considered part of the economically deliverable supply of a Treasury bond futures contract.

    Efficient Market: In economic theory, an efficient market is one in which market prices adjust rapidly to reflect new information. The degree to which the market is efficient depends on the quality of information reflected in market prices. In an efficient market, profitable arbitrage opportunities do not exist and traders cannot expect to consistently outperform the market unless they have lower-cost access to information that is reflected in market prices or unless they have access to information before it is reflected in market prices. See Random Walk.

    EFP: See Exchange for Physical.

    Electronic Trading Facility: A trading facility that operates by an electronic or telecommunications network instead of a trading floor and maintains an automated audit trail of transactions.

    Eligible Commercial Entity: An eligible contract participant or other entity approved by the CFTC that has a demonstrable ability to make or take delivery of an underlying commodity of a contract; incurs risks related to the commodity; or is a dealer that regularly provides risk management, hedging services, or market-making activities to entities trading commodities or derivative agreements, contracts, or transactions in commodities.

    Eligible Contract Participant: An entity, such as a financial institution, insurance company, or commodity pool, that is classified by the Commodity Exchange Act as an eligible contract participant based upon its regulated status or amount of assets. This classification permits these persons to engage in transactions (such as trading on a derivatives transaction execution facility) not generally available to non-eligible contract participants, i.e., retail customers.

    Elliot Wave: (1) A theory named after Ralph Elliot, who contended that the stock market tends to move in discernible and predictable patterns reflecting the basic harmony of nature and extended by other technical analysts to futures markets; (2) in technical analysis, a charting method based on the belief that all prices act as waves, rising and falling rhythmically.

    E-Local: A person with trading privileges at an exchange with an electronic trading facility who trades electronically (rather than in a pit or ring) for his or her own account, often at a trading arcade.

    E-Mini: A mini contract that is traded exclusively on an electronic trading facility. E-Mini is a trademark of the Chicago Mercantile Exchange.

    Emergency: Any market occurrence or circumstance which requires immediate action and threatens or may threaten such things as the fair and orderly trading in, or the liquidation of, or delivery pursuant to, any contracts on a contract market.

    Enumerated Agricultural Commodities: The commodities specifically listed in Section 1a(3) of the Commodity Exchange Act: wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen concentrated orange juice.

    Equity: As used on a trading account statement, refers to the residual dollar value of a futures or option trading account, assuming it was liquidated at current prices.

    Euro: The official currency of most members of the European Union.

    Eurocurrency: Certificates of Deposit (CDs), bonds, deposits, or any capital market instrument issued outside of the national boundaries of the currency in which the instrument is denominated (for example, Eurodollars, Euro-Swiss francs, or Euroyen).

    Eurodollars: U.S. dollar deposits placed with banks outside the U.S. Holders may include individuals, companies, banks, and central banks.

    European Option: An option that may be exercised only on the expiration date. See American Option.

    Even Lot: A unit of trading in a commodity established by an exchange to which official price quotations apply. See Round Lot.

    Exchange: A central marketplace with established rules and regulations where buyers and sellers meet to trade futures and options contracts or securities. Exchanges include designated contract markets and derivatives transaction execution facilities.

    Exchange for Physicals (EFP): A transaction in which the buyer of a cash commodity transfers to the seller a corresponding amount of long futures contracts, or receives from the seller a corresponding amount of short futures, at a price difference mutually agreed upon. In this way, the opposite hedges in futures of both parties are closed out simultaneously. Also called Exchange of Futures for Cash, AA (against actuals), or Ex-Pit transactions.

    Exchange of Futures for Cash: See Exchange for Physicals.

    Exchange of Futures for Swaps (EFS): A privately negotiated transaction in which a position in a physical delivery futures contract is exchanged for a cash-settled swap position in the same or a related commodity, pursuant to the rules of a futures exchange. See Exchange for Physicals.

    Exchange Rate: The price of one currency stated in terms of another currency.

    Exchange Risk Factor: The delta of an option as computed daily by the exchange on which it is traded.

    Excluded Commodity: In general, the Commodity Exchange Act defines an excluded commodity as: any financial instrument such as a security, currency, interest rate, debt instrument, or credit rating; any economic or commercial index other than a narrow-based commodity index; or any other value that is out of the control of participants and is associated with an economic consequence. See the Commodity Exchange Act definition of excluded commodity.

    Exempt Board of Trade: A trading facility that trades commodities (other than securities or securities indexes) having a nearly inexhaustible deliverable supply and either no cash market or a cash market so liquid that any contract traded on the commodity is highly unlikely to be susceptible to manipulation. An exempt board of trade’s contracts must be entered into by parties that are eligible contract participants.

    Exempt Commercial Market: An electronic trading facility that trades exempt commodities on a principal-to-principal basis solely between persons that are eligible commercial entities.

    Exempt Commodity: The Commodity Exchange Act defines an exempt commodity as any commodity other than an excluded commodity or an agricultural commodity. Examples include energy commodities and metals.

    Exempt Foreign Firm: A foreign firm that does business with U.S. customers only on foreign exchanges and is exempt from registration under CFTC regulations based upon compliance with its home country’s regulatory framework (also known as a “Rule 30.10 firm”).

    Exercise Price (Strike Price): The price, specified in the option contract, at which the underlying futures contract, security, or commodity will move from seller to buyer.

    Exotic Options: Any of a wide variety of options with non-standard payout structures or other features, including Asian options and lookback options. Exotic options are mostly traded in the over-the-counter market.

    Expiration Date: The date on which an option contract automatically expires; the last day an option may be exercised.

    Extrinsic Value: See Time Value.

    Ex-Pit: See Transfer Trades and Exchange for Physicals.


    FAB (Five Against Bond) Spread: A futures spread trade involving the buying (selling) of a five-year Treasury note futures contract and the selling (buying) of a long-term (15-30 year) Treasury bond futures contract.

    Fannie Mae: A corporation (government-sponsored enterprise) created by Congress to support the secondary mortgage market (formerly the Federal National Mortgage Association). It purchases and sells residential mortgages insured by the Federal Home Administration (FHA) or guaranteed by the Veteran's Administration (VA). See Freddie Mac.

    FAN (Five Against Note) Spread: A futures spread trade involving the buying (selling) of a five-year Treasury note futures contract and the selling (buying) of a ten-year Treasury note futures contract.

    Fast Market: Transactions in the pit or ring take place in such volume and with such rapidity that price reporters behind with price quotations insert "FAST" and show a range of prices. Also called a fast tape.

    Feed Ratio: The relationship of the cost of feed, expressed as a ratio to the sale price of animals, such as the corn-hog ratio. These serve as indicators of the profit margin or lack of profit in feeding animals to market weight.

    FIA: See Futures Industry Association.

    Fibonacci Numbers: A number sequence discovered by a thirteenth century Italian mathematician Leonardo Fibonacci (circa 1170-1250), who introduced Arabic numbers to Europe, in which the sum of any two consecutive numbers equals the next highest number—i.e., following this sequence: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, and so on. The ratio of any number to its next highest number approaches 0.618 after the first four numbers. These numbers are used by technical analysts to determine price objectives from percentage retracements.

    Fictitious Trading: Wash trading, bucketing, cross trading, or other schemes which give the appearance of trading but actually no bona fide, competitive trade has occurred.

    Fill: The execution of an order.

    Fill or Kill Order (FOK): An order that demands immediate execution or cancellation. Typically involving a designation, added to an order, instructing the broker to offer or bid (as the case may be) one time only; if the order is not filled immediately, it is then automatically cancelled.

    Final Settlement Price: The price at which a cash-settled futures contract is settled at maturity, pursuant to a procedure specified by the exchange.

    Financial Instruments: As used by the CFTC, this term generally refers to any futures or option contract that is not based on an agricultural commodity or a natural resource. It includes currencies, equity securities, fixed income securities, and indexes of various kinds.

    Financial Settlement: Cash settlement, especially for energy derivatives.

    First Notice Day: The first day on which notices of intent to deliver actual commodities against futures market positions can be received. First notice day may vary with each commodity and exchange.

    Fix, Fixing: See Gold Fixing.

    Fixed Income Security: A security whose nominal (or current dollar) yield is fixed or determined with certainty at the time of purchase, typically a debt security.

    Floor Broker: A person with exchange trading privileges who, in any pit, ring, post, or other place provided by an exchange for the meeting of persons similarly engaged, executes for another person any orders for the purchase or sale of any commodity for future delivery.

    Floor Trader: A person with exchange trading privileges who executes his own trades by being personally present in the pit or ring for futures trading. See Local.

    F.O.B. (Free On Board): Indicates that all delivery, inspection and elevation, or loading costs involved in putting commodities on board a carrier have been paid.

    Forced Liquidation: The situation in which a customer's account is liquidated (open positions are offset) by the brokerage firm holding the account, usually after notification that the account is under-margined due to adverse price movements and failure to meet margin calls.

    Force Majeure: A clause in a supply contract that permits either party not to fulfill the contractual commitments due to events beyond their control. These events may range from strikes to export delays in producing countries.

    Foreign Exchange: Trading in foreign currency.

    Forex: Refers to the over-the-counter market for foreign exchange transactions. Also called the foreign exchange market.

    Forwardation: See Contango.

    Forward Contract: A cash transaction common in many industries, including commodity merchandising, in which a commercial buyer and seller agree upon delivery of a specified quality and quantity of goods at a specified future date. Terms may be more “personalized” than is the case with standardized futures contracts (i.e., delivery time and amount are as determined between seller and buyer). A price may be agreed upon in advance, or there may be agreement that the price will be determined at the time of delivery.

    Forward Market: The over-the-counter market for forward contracts.

    Forward Months: Futures contracts, currently trading, calling for later or distant delivery. See Deferred Futures, Back Months.

    Freddie Mac: A corporation (government-sponsored enterprise) created by Congress to support the secondary mortgage market (formerly the Federal Home Loan Mortgage Corporation). It purchases and sells residential mortgages insured by the Federal Home Administration (FHA) or guaranteed by the Veterans Administration (VA). See Fannie Mae.

    Front Month: The spot or nearby delivery month, the nearest traded contract month. See Back Month.

    Front Running: With respect to commodity futures and options, taking a futures or option position based upon non-public information regarding an impending transaction by another person in the same or related future or option. Also known as trading ahead.

    Front Spread: A delta-neutral ratio spread in which more options are sold than bought. Also called ratio vertical spread. A front spread will increase in value if volatility decreases.

    Full Carrying Charge, Full Carry: See Carrying Charges.

    Fund of Funds: A commodity pool that invests in other commodity pools rather than directly in futures and options contracts.

    Fundamental Analysis: Study of basic, underlying factors that will affect the supply and demand of the commodity being traded in futures contracts. See Technical Analysis.

    Fungibility: The characteristic of interchangeability. Futures contracts for the same commodity and delivery month traded on the same exchange are fungible due to their standardized specifications for quality, quantity, delivery date, and delivery locations.

    Futures: See Futures Contract.

    Futures Commission Merchant (FCM): Individuals, associations, partnerships, corporations, and trusts that solicit or accept orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any exchange and that accept payment from or extend credit to those whose orders are accepted.

    Futures Contract: An agreement to purchase or sell a commodity for delivery in the future: (1) at a price that is determined at initiation of the contract; (2) that obligates each party to the contract to fulfill the contract at the specified price; (3) that is used to assume or shift price risk; and (4) that may be satisfied by delivery or offset.

    Futures-equivalent: A term frequently used with reference to speculative position limits for options on futures contracts. The futures-equivalent of an option position is the number of options multiplied by the previous day's risk factor or delta for the option series. For example, ten deep out-of-money options with a delta of 0.20 would be considered two futures-equivalent contracts. The delta or risk factor used for this purpose is the same as that used in delta-based margining and risk analysis systems.

    Futures Industry Association (FIA): A membership organization for futures commission merchants (FCMs) which, among other activities, offers education courses on the futures markets, disburses information, and lobbies on behalf of its members.

    Futures Option: An option on a futures contract.

    Futures Price: (1) Commonly held to mean the price of a commodity for future delivery that is traded on a futures exchange; (2) the price of any futures contract.


    Gamma: A measurement of how fast the delta of an option changes, given a unit change in the underlying futures price; the “delta of the delta.”

    Ginzy Trading: A non-competitive trade practice in which a floor broker, in executing an order—particularly a large order—will fill a portion of the order at one price and the remainder of the order at another price to avoid an exchange's rule against trading at fractional increments or "split ticks."

    Give Up: A contract executed by one broker for the client of another broker that the client orders to be turned over to the second broker. The broker accepting the order from the customer collects a fee from the carrying broker for the use of the facilities. Often used to consolidate many small orders or to disperse large ones.

    Gold Certificate: A certificate attesting to a person's ownership of a specific amount of gold bullion.

    Gold Fixing (Gold Fix): The setting of the gold price at 10:30 a.m. (first fixing) and 3:00 p.m. (second fixing) in London by representatives of the London gold market.

    Gold/Silver Ratio: The number of ounces of silver required to buy one ounce of gold at current spot prices.

    Good This Week Order (GTW): Order which is valid only for the week in which it is placed.

    Good 'Till Canceled Order (GTC): An order which is valid until cancelled by the customer. Unless specified GTC, unfilled orders expire at the end of the trading day. See Open Order.

    GPM: See Gross Processing Margin.

    Grades: Various qualities of a commodity.

    Grading Certificates: A formal document setting forth the quality of a commodity as determined by authorized inspectors or graders.

    Grain Futures Act: Federal statute that provided for the regulation of trading in grain futures, effective June 22, 1923; administered by the U.S. Department of Agriculture; amended in 1936 by the Commodity Exchange Act.

    Grantor: The maker, writer, or issuer of an option contract who, in return for the premium paid for the option, stands ready to purchase the underlying commodity (or futures contract) in the case of a put option or to sell the underlying commodity (or futures contract) in the case of a call option.

    Gross Processing Margin (GPM): Refers to the difference between the cost of a commodity and the combined sales income of the finished products that result from processing the commodity. Various industries have formulas to express the relationship of raw material costs to sales income from finished products. See Crack Spread, Crush Spread, and Spark Spread.

    GTC: See Good 'Till Canceled Order.

    GTW: See Good This Week Order.

    Guaranteed Introducing Broker: An introducing broker that has entered into a guarantee agreement with a futures commission merchant (FCM), whereby the FCM agrees to be jointly and severally liable for all of the introducing broker’s obligations under the Commodity Exchange Act. By entering into the agreement, the introducing broker is relieved from the necessity of raising its own capital to satisfy minimum financial requirements. In contrast, an independent introducing broker must raise its own capital to meet minimum financial requirements.

  • Futures and Options Glossary H - L


    Haircut: In computing the value of assets for purposes of capital, segregation, or margin requirements, a percentage reduction from the stated value (e.g., book value or market value) to account for possible declines in value that may occur before assets can be liquidated.

    Hand Held Terminal: A small computer terminal used by floor brokers or floor traders on an exchange to record trade information and transmit that information to the clearing organization.

    Hardening: (1) Describes a price which is gradually stabilizing; (2) a term indicating a slowly advancing market.

    Head and Shoulders: In technical analysis, a chart formation that resembles a human head and shoulders and is generally considered to be predictive of a price reversal. A head and shoulders top (which is considered predictive of a price decline) consists of a high price, a decline to a support level, a rally to a higher price than the previous high price, a second decline to the support level, and a weaker rally to about the level of the first high price. The reverse (upside-down) formation is called a head and shoulders bottom (which is considered predictive of a price rally).

    Heavy: A market in which prices are demonstrating either an inability to advance or a slight tendency to decline.

    Hedge Exemption: An exemption from speculative position limits for bona fide hedgers and certain other persons who meet the requirements of exchange and CFTC rules.

    Hedge Fund: A private investment fund or pool that trades and invests in various assets such as securities, commodities, currency, and derivatives on behalf of its clients, typically wealthy individuals. Some commodity pool operators operate hedge funds.

    Hedge Ratio: Ratio of the value of futures contracts purchased or sold to the value of the cash commodity being hedged, a computation necessary to minimize basis risk.

    Hedging: Taking a position in a futures market opposite to a position held in the cash market to minimize the risk of financial loss from an adverse price change; or a purchase or sale of futures as a temporary substitute for a cash transaction that will occur later. One can hedge either a long cash market position (e.g., one owns the cash commodity) or a short cash market position (e.g., one plans on buying the cash commodity in the future).

    Henry Hub: A natural gas pipeline hub in Louisiana that serves as the delivery point for New York Mercantile Exchange natural gas futures contracts and often serves as a benchmark for wholesale natural gas prices across the U.S.

    Historical Volatility: A statistical measure of the volatility of a futures contract, security, or other instrument over a specified number of past trading days.

    Hog-Corn Ratio: See Feed Ratio.

    Horizontal Spread (also called Time Spread or Calendar Spread): An option spread involving the simultaneous purchase and sale of options of the same class and strike prices but different expiration dates. See Diagonal Spread, Vertical Spread.

    Hybrid Instruments: Financial instruments that possess, in varying combinations, characteristics of forward contracts, futures contracts, option contracts, debt instruments, bank depository interests, and other interests. Certain hybrid instruments are exempt from CFTC regulation.


    IB: See Introducing Broker.

    Implied Repo Rate: The rate of return that can be obtained from selling a debt instrument futures contract and simultaneously buying a bond or note deliverable against that futures contract with borrowed funds. The bond or note with the highest implied repo rate is cheapest to deliver.

    Implied Volatility: The volatility of a futures contract, security, or other instrument as implied by the prices of an option on that instrument, calculated using an options pricing model.

    Index Arbitrage: The simultaneous purchase (sale) of stock index futures and the sale (purchase) of some or all of the component stocks that make up the particular stock index to profit from sufficiently large intermarket spreads between the futures contract and the index itself. Also see Arbitrage, Program Trading.

    Indirect Bucketing: Also referred to as indirect trading against. Refers to when a floor broker effectively trades opposite his customer in a pair of non-competitive transactions by buying (selling) opposite an accommodating trader to fill a customer order and by selling (buying) for his personal account opposite the same accommodating trader. The accommodating trader assists the floor broker by making it appear that the customer traded opposite him rather than opposite the floor broker.

    Inflation-Indexed Debt Instrument: Generally a debt instrument (such as a bond or note) on which the payments are adjusted for inflation and deflation. In a typical inflation-indexed instrument, the principal amount is adjusted monthly based on an inflation index such as the Consumer Price Index.

    Initial Deposit: See Initial Margin.

    Initial Margin: Customers' funds put up as security for a guarantee of contract fulfillment at the time a futures market position is established. See Original Margin.

    In Position: Refers to a commodity located where it can readily be moved to another point or delivered on a futures contract. Commodities not so situated are "out of position." Soybeans in Mississippi are out of position for delivery in Chicago, but in position for export shipment from the Gulf of Mexico.

    In Sight: The amount of a particular commodity that arrives at terminal or central locations in or near producing areas. When a commodity is "in sight," it is inferred that reasonably prompt delivery can be made; the quantity and quality also become known factors rather than estimates.

    Instrument: A tradable asset such as a commodity, security, or derivative, or an index or value that underlies a derivative or could underlie a derivative.

    Intercommodity Spread: A spread in which the long and short legs are in two different but generally related commodity markets. Also called an intermarket spread. See Spread.

    Interdelivery Spread: A spread involving two different months of the same commodity. Also called an intracommodity spread. See Spread.

    Interest Rate Futures: Futures contracts traded on fixed income securities such as U.S. Treasury issues, or based on the levels of specified interest rates such as LIBOR (London Interbank Offered Rate). Currency is excluded from this category, even though interest rates are a factor in currency values.

    Interest Rate Swap: A swap in which the two counterparties agree to exchange interest rate flows. Typically, one party agrees to pay a fixed rate on a specified series of payment dates and the other party pays a floating rate that may be based on LIBOR (London Interbank Offered Rate) on those payment dates. The interest rates are paid on a specified principal amount called the notional principal.

    Intermarket Spread: See Spread and Intercommodity Spread.

    Intermediary: A person who acts on behalf of another person in connection with futures trading, such as a futures commission merchant, introducing broker, commodity pool operator, commodity trading advisor, or associated person.

    International Swaps and Derivatives Association (ISDA): A New York-based group of major international swaps dealers, that publishes the Code of Standard Wording, Assumptions and Provisions for Swaps, or Swaps Code, for U.S. dollar interest rate swaps as well as standard master interest rate, credit, and currency swap agreements and definitions for use in connection with the creation and trading of swaps.

    In-The-Money: A term used to describe an option contract that has a positive value if exercised. A call with a strike price of $390 on gold trading at $400 is in-the-money 10 dollars. See Intrinsic Value.

    Intracommodity Spread: See Spread and Interdelivery Spread.

    Intrinsic Value: A measure of the value of an option or a warrant if immediately exercised, that is, the extent to which it is in-the-money. The amount by which the current price for the underlying commodity or futures contract is above the strike price of a call option or below the strike price of a put option for the commodity or futures contract.

    Introducing Broker (IB): A person (other than a person registered as an associated person of a futures commission merchant) who is engaged in soliciting or in accepting orders for the purchase or sale of any commodity for future delivery on an exchange who does not accept any money, securities, or property to margin, guarantee, or secure any trades or contracts that result therefrom.

    Inverted Market: A futures market in which the nearer months are selling at prices higher than the more distant months; a market displaying "inverse carrying charges," characteristic of markets with supply shortages. See Backwardation.

    Invisible Supply: Uncounted stocks of a commodity in the hands of wholesalers, manufacturers, and producers that cannot be identified accurately; stocks outside commercial channels but theoretically available to the market. See Visible Supply.

    Invoice Price: The price fixed by the clearing house at which deliveries on futures are invoiced—generally the price at which the futures contract is settled when deliveries are made. Also called Delivery Price.

    ISDA: See International Swaps and Derivatives Association.

    Job Lot: A form of contract having a smaller unit of trading than is featured in a regular contract.

    Kerb Trading or Dealing: See Curb Trading.


    Large Order Execution (LOX) Procedures: Rules in place at the Chicago Mercantile Exchange that authorize a member firm that receives a large order from an initiating party to solicit counterparty interest off the exchange floor prior to open execution of the order in the pit and that provide for special surveillance procedures. The parties determine a maximum quantity and an "intended execution price." Subsequently, the initiating party's order quantity is exposed to the pit; any bids (or offers) up to and including those at the intended execution price are hit (acceptable). The unexecuted balance is then crossed with the contraside trader found using the LOX procedures.

    Large Traders: A large trader is one who holds or controls a position in any one future or in any one option expiration series of a commodity on any one exchange equaling or exceeding the exchange or CFTC-specified reporting level.

    Last Notice Day: The final day on which notices of intent to deliver on futures contracts may be issued.

    Last Trading Day: Day on which trading ceases for the maturing (current) delivery month.

    Leaps: Long-dated, exchange-traded options. Stands for “Long-term Equity Anticipation Securities.”

    Leverage: The ability to control large dollar amounts of a commodity or security with a comparatively small amount of capital.

    LIBOR Rate: The London Interbank Offered Rate. The rate of interest at which banks borrow funds from other banks, in marketable size, in the London interbank market. LIBOR rates are disseminated by the British Bankers Association. Some interest rate futures contracts, including Eurodollar futures, are cash settled based on LIBOR.

    Licensed Warehouse: A warehouse approved by an exchange from which a commodity may be delivered on a futures contract. See Regular Warehouse.

    Life of Contract: Period between the beginning of trading in a particular futures contract and the expiration of trading. In some cases, this phrase denotes the period already passed in which trading has already occurred. For example, "The life-of-contract high so far is $2.50." Same as life of delivery or life of the future.

    Limit Up or Limit Down: The maximum price advance or decline from the previous day's settlement price permitted during one trading session, as fixed by the rules of an exchange. In some futures contracts, the limit may be expanded or removed during a trading session a specified period of time after the contract is locked limit. See Daily Price Limit.

    Limit Move: See Locked Limit.

    Limit Only: The definite price stated by a customer to a broker restricting the execution of an order to buy for not more than, or to sell for not less than, the stated price.

    Limit Order: An order in which the customer specifies a minimum sale price or maximum purchase price, as contrasted with a market order, which implies that the order should be filled as soon as possible at the market price.

    Liquidation: The closing out of a long position. The term is sometimes used to denote closing out a short position, but this is more often referred to as covering. See Cover, Offset.

    Liquid Market: A market in which selling and buying can be accomplished with minimal effect on price.

    Local: An individual with exchange trading privileges who trades for his own account, traditionally on an exchange floor, and whose activities provide market liquidity. See Floor Trader, E-Local.

    Location: A Delivery Point for a futures contract.

    Locked-In: A hedged position that cannot be lifted without offsetting both sides of the hedge (spread). See Hedging. Also refers to being caught in a limit price move.

    Locked Limit: A price that has advanced or declined the permissible limit during one trading session, as fixed by the rules of an exchange. Also called Limit Move.

    London Gold Market: Refers to the dealers who set (fix) the gold price in London. See Gold Fixing.

    Long: (1) One who has bought a futures contract to establish a market position; (2) a market position that obligates the holder to take delivery; (3) one who owns an inventory of commodities. See Short.

    Long Hedge: See Buying Hedge.

    Long the Basis: A person or firm that has bought the spot commodity and hedged with a sale of futures is said to be long the basis.

    Lookalike Option: An over-the-counter option that is cash settled based on the settlement price of a similar exchange-traded futures contract on a specified trading day.

    Lookalike Swap: An over-the-counter swap that is cash settled based on the settlement price of a similar exchange-traded futures contract on a specified trading day.

    Lookback Option: An exotic option whose payoff depends on the minimum or maximum price of the underlying asset during some portion of the life of the option.

    Lot: A unit of trading. See Even Lot, Job Lot, and Round Lot.

  • Futures and Options Glossary M - O


    Macro Fund: A hedge fund that specializes in strategies designed to profit from expected macroeconomic events.

    Maintenance Margin: See Margin.

    Managed Account: See Controlled Account and Discretionary Account.

    Manipulation: Any planned operation, transaction, or practice that causes or maintains an artificial price. Specific types include corners and squeezes as well as unusually large purchases or sales of a commodity or security in a short period of time in order to distort prices, and putting out false information in order to distort prices.

    Many-to-Many: Refers to a trading platform in which multiple participants have the ability to execute or trade commodities, derivatives, or other instruments by accepting bids and offers made by multiple other participants. In contrast to one-to-many platforms, many-to-many platforms are considered trading facilities under the Commodity Exchange Act. Traditional exchanges are many-to-many platforms.

    Margin: The amount of money or collateral deposited by a customer with his broker, by a broker with a clearing member, or by a clearing member with a clearing organization. The margin is not partial payment on a purchase. Also called Performance Bond. (1) Initial margin is the amount of margin required by the broker when a futures position is opened; (2) Maintenance margin is an amount that must be maintained on deposit at all times. If the equity in a customer's account drops to or below the level of maintenance margin because of adverse price movement, the broker must issue a margin call to restore the customer's equity to the initial level. See Variation Margin. Exchanges specify levels of initial margin and maintenance margin for each futures contract, but futures commission merchants may require their customers to post margin at higher levels than those specified by the exchange. Futures margin is determined by the SPAN margining system, which takes into account all positions in a customer’s portfolio.

    Margin Call: (1) A request from a brokerage firm to a customer to bring margin deposits up to initial levels; (2) a request by the clearing organization to a clearing member to make a deposit of original margin, or a daily or intra-day variation margin payment because of adverse price movement, based on positions carried by the clearing member.

    Market-if-Touched (MIT) Order: An order that becomes a market order when a particular price is reached. A sell MIT is placed above the market; a buy MIT is placed below the market. Also referred to as a board order. Compare to Stop Order.

    Market Maker: A professional securities dealer or person with trading privileges on an exchange who has an obligation to buy when there is an excess of sell orders and to sell when there is an excess of buy orders. By maintaining an offering price sufficiently higher than their buying price, these firms are compensated for the risk involved in allowing their inventory of securities to act as a buffer against temporary order imbalances. In the futures industry, this term is sometimes loosely used to refer to a floor trader or local who, in speculating for his own account, provides a market for commercial users of the market. Occasionally a futures exchange will compensate a person with exchange trading privileges to take on the obligations of a market maker to enhance liquidity in a newly listed or lightly traded futures contract. See Specialist System.

    Market-on-Close: An order to buy or sell at the end of the trading session at a price within the closing range of prices. See Stop-Close-Only Order.

    Market-on-Opening: An order to buy or sell at the beginning of the trading session at a price within the opening range of prices.

    Market Order: An order to buy or sell a futures contract at whatever price is obtainable at the time it is entered in the ring, pit, or other trading platform. See At-the-Market Limit Order.

    Mark-to-Market: Part of the daily cash flow system used by U.S. futures exchanges to maintain a minimum level of margin equity for a given futures or option contract position by calculating the gain or loss in each contract position resulting from changes in the price of the futures or option contracts at the end of each trading session. These amounts are added or subtracted to each account balance.

    Maturity: Period within which a futures contract can be settled by delivery of the actual commodity.

    Maximum Price Fluctuation: See Limit (Up or Down) and Daily Price Limit.

    Member Rate: Commission charged for the execution of an order for a person who is a member of or has trading privileges at the exchange.

    Mini: Refers to a futures contract that has a smaller contract size than an otherwise identical futures contract.

    Minimum Price Contract: A hybrid commercial forward contract for agricultural products that includes a provision guaranteeing the person making delivery a minimum price for the product. For agricultural commodities, these contracts became much more common with the introduction of exchange-traded options on futures contracts, which permit buyers to hedge the price risks associated with such contracts.

    Minimum Price Fluctuation (Minimum Tick): Smallest increment of price movement possible in trading a given contract.

    Minimum Tick: See Minimum Price Fluctuation.

    MOB Spread: A spread between the municipal bond futures contract and the Treasury bond contract, also known as munis over bonds.

    Momentum: In technical analysis, the relative change in price over a specific time interval. Often equated with speed or velocity and considered in terms of relative strength.

    Money Market: The market for short-term debt instruments.

    Multilateral Clearing Organization: See Clearing Organization.


    Naked Option: The sale of a call or put option without holding an equal and opposite position in the underlying instrument. Also referred to as an uncovered option, naked call, or naked put.

    Narrow-Based Security Index: In general, the Commodity Exchange Act defines a narrow-based security index as an index of securities that meets one of the following four requirements (1) it has nine or fewer components; (2) one component comprises more than 30 percent of the index weighting; (3) the five highest weighted components comprise more than 60 percent of the index weighting, or (4) the lowest weighted components comprising in the aggregate 25 percent of the index’s weighting have an aggregate dollar value of average daily volume over a six-month period of less than $50 million ($30 million if there are at least 15 component securities). However, the legal definition in Section 1a(25) of the Commodity Exchange Act, 7 USC 1a(25), contains several exceptions to this provision. See Broad-Based Security Index, Security Future.

    National Futures Association (NFA): A self-regulatory organization whose members include futures commission merchants, commodity pool operators, commodity trading advisors, introducing brokers, commodity exchanges, commercial firms, and banks, that is responsible—under CFTC oversight—for certain aspects of the regulation of FCMs, CPOs, CTAs, IBs, and their associated persons, focusing primarily on the qualifications and proficiency, financial condition, retail sales practices, and business conduct of these futures professionals. NFA also performs arbitration and dispute resolution functions for industry participants.

    Nearbys: The nearest delivery months of a commodity futures market.

    Nearby Delivery Month: The month of the futures contract closest to maturity; the front month or lead month.

    Negative Carry: The cost of financing a financial instrument (the short-term rate of interest), when the cost is above the current return of the financial instrument. See Carrying Charges and Positive Carry.

    Net Asset Value (NAV): The value of each unit of participation in a commodity pool.

    Net Position: The difference between the open long contracts and the open short contracts held by a trader in any one commodity.

    NFA: National Futures Association.

    Next Day: A spot contract that provides for delivery of a commodity on the next calendar day or the next business day. Also called day ahead.

    NOB (Note Against Bond) Spread: A futures spread trade involving the buying (selling) of a ten-year Treasury note futures contract and the selling (buying) of a Treasury bond futures contract.

    Non-Member Traders: Speculators and hedgers who trade on the exchange through a member or a person with trading privileges but who do not hold exchange memberships or trading privileges.

    Nominal Price (or Nominal Quotation): Computed price quotation on a futures or option contract for a period in which no actual trading took place, usually an average of bid and asked prices or computed using historical or theoretical relationships to more active contracts.

    Notice Day: Any day on which notices of intent to deliver on futures contracts may be issued.

    Notice of Intent to Deliver: A notice that must be presented by the seller of a futures contract to the clearing organization prior to delivery. The clearing organization then assigns the notice and subsequent delivery instrument to a buyer. Also notice of delivery.

    Notional Principal: In an interest rate swap, forward rate agreement, or other derivative instrument, the amount or, in a currency swap, each of the amounts to which interest rates are applied in order to calculate periodic payment obligations. Also called the notional amount, the contract amount, the reference amount, and the currency amount.

    NYMEX Lookalike: A lookalike swap or lookalike option that is based on a futures contract traded on the New York Mercantile Exchange (NYMEX).

    NYMEX Swap: A lookalike swap that is based on a futures contract traded on the New York Mercantile Exchange (NYMEX).


    OCO: See One Cancels the Other Order.

    Offer: An indication of willingness to sell at a given price; opposite of bid, the price level of the offer may be referred to as the ask.

    Off Exchange: See Over-the-Counter.

    Offset: Liquidating a purchase of futures contracts through the sale of an equal number of contracts of the same delivery month, or liquidating a short sale of futures through the purchase of an equal number of contracts of the same delivery month. See Closing Out and Cover.

    Omnibus Account: An account carried by one futures commission merchant, the carrying FCM, for another futures commission merchant, the originating FCM, in which the transactions of two or more persons, who are customers of the originating FCM, are combined and carried by the carrying FCM. Omnibus account titles must clearly show that the funds and trades therein belong to customers of the originating FCM. An originating broker must use an omnibus account to execute or clear trades for customers at a particular exchange where it does not have trading or clearing privileges.

    On Track (or Track Country Station): (1) A type of deferred delivery in which the price is set f.o.b. seller's location, and the buyer agrees to pay freight costs to his destination; (2) commodities loaded in railroad cars on tracks.

    One Cancels the Other (OCO) Order: A pair of orders, typically limit orders, whereby if one order is filled, the other order will automatically be cancelled. For example, an OCO order might consist of an order to buy 10 calls with a strike price of 50 at a specified price or buy 20 calls with a strike price of 55 (with the same expiration date) at a specified price.

    One-to-Many: Refers to a proprietary trading platform in which the platform operator posts bids and offers for commodities, derivatives, or other instruments and serves as a counterparty to every transaction executed on the platform. In contrast to many-to-many platforms, one-to-many platforms are not considered trading facilities under the Commodity Exchange Act.

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

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

    Open Interest: The total number of futures contracts long or short in a delivery month or market that has been entered into and not yet liquidated by an offsetting transaction or fulfilled by delivery. Also called open contracts or open commitments.

    Open Order (or Orders): An order that remains in force until it is canceled or until the futures contracts expire. See Good 'Till Canceled and Good This Week orders.

    Open Outcry: A method of public auction, common to most U.S. commodity exchanges, where trading occurs on a trading floor and traders may bid and offer simultaneously either for their own accounts or for the accounts of customers. Transactions may take place simultaneously at different places in the trading pit or ring. At most exchanges outside the U.S., open outcry has been replaced by electronic trading platforms. See Specialist System.

    Open Trade Equity: The unrealized gain or loss on open futures positions.

    Option: A contract that gives the buyer the right, but not the obligation, to buy or sell a specified quantity of a commodity or other instrument at a specific price within a specified period of time, regardless of the market price of that instrument. Also see Put and Call.

    Option Buyer: The person who buys calls, puts, or any combination of calls and puts.

    Option Writer: The person who originates an option contract by promising to perform a certain obligation in return for the price or premium of the option. Also known as option grantor or option seller.

    Option Pricing Model: A mathematical model used to calculate the theoretical value of an option. Inputs to option pricing models typically include the price of the underlying instrument, the option strike price, the time remaining till the expiration date, the volatility of the underlying instrument, and the risk-free interest rate (e.g., the Treasury bill interest rate). Examples of option pricing models include Black-Scholes and Cox-Ross-Rubinstein.

    Original Margin: Term applied to the initial deposit of margin money each clearing member firm is required to make according to clearing organization rules based upon positions carried, determined separately for customer and proprietary positions; similar in concept to the initial margin or security deposit required of customers by exchange rules. See Initial Margin.

    OTC: See Over-the-Counter.

    Out of Position: See In Position.

    Out-Of-The-Money: A term used to describe an option that has no intrinsic value. For example, a call with a strike price of $400 on gold trading at $390 is out-of-the-money 10 dollars.

    Outright Futures: An order to buy or sell only one specific type of futures contract; an order that is not a spread order.

    Out Trade: A trade that cannot be cleared by a clearing organization because the trade data submitted by the two clearing members or two traders involved in the trade differs in some respect (e.g., price and/or quantity). In such cases, the two clearing members or traders involved must reconcile the discrepancy, if possible, and resubmit the trade for clearing. If an agreement cannot be reached by the two clearing members or traders involved, the dispute would be settled by an appropriate exchange committee.

    Overbought: A technical opinion that the market price has risen too steeply and too fast in relation to underlying fundamental factors. Rank and file traders who were bullish and long have turned bearish.

    Overnight Trade: A trade which is not liquidated during the same trading session during which it was established.

    Oversold: A technical opinion that the market price has declined too steeply and too fast in relation to underlying fundamental factors; rank and file traders who were bearish and short have turned bullish.

    Over-the-Counter (OTC): The trading of commodities, contracts, or other instruments not listed on any exchange. OTC transactions can occur electronically or over the telephone. Also referred to as Off-Exchange.

  • Futures and Options Glossary P - S


    P&S (Purchase and Sale Statement): A statement sent by a futures commission merchant to a customer when any part of a futures position is offset, showing the number of contracts involved, the prices at which the contracts were bought or sold, the gross profit or loss, the commission charges, the net profit or loss on the transactions, and the balance. FCMs also send P&S Statements whenever any other event occurs that alters the account balance including when the customer deposits or withdraws margin and when the FCM places excess margin in interest bearing instruments for the customer’s benefit.

    Paper Profit or Loss: The profit or loss that would be realized if open contracts were liquidated as of a certain time or at a certain price.

    Par: (1) Refers to the standard delivery point(s) and/or quality of a commodity that is deliverable on a futures contract at contract price. Serves as a benchmark upon which to base discounts or premiums for varying quality and delivery locations; (2) in bond markets, an index (usually 100) representing the face value of a bond.

    Path Dependent Option: An option whose valuation and payoff depends on the realized price path of the underlying asset, such as an Asian option or a Lookback option.

    Pay/Collect: A shorthand method of referring to the payment of a loss (pay) and receipt of a gain (collect) by a clearing member to or from a clearing organization that occurs after a futures position has been marked-to-market. See Variation Margin.

    Pegged Price: The price at which a commodity has been fixed by agreement.

    Pegging: Effecting transactions in an instrument underlying an option to prevent a decline in the price of the instrument shortly prior to the option’s expiration date so that previously written put options will expire worthless, thus protecting premiums previously received. See Capping.

    Performance Bond: See Margin.

    Pip: The smallest price unit of a commodity or currency.

    Pit: A specially constructed area on the trading floor of some exchanges where trading in a futures contract or option is conducted. On other exchanges, the term ring designates the trading area for commodity contract.

    Pit Brokers: See Floor Broker.

    Point-and-Figure Chart: A method of charting that uses prices to form patterns of movement without regard to time. It defines a price trend as a continued movement in one direction until a reversal of a predetermined criterion is met.

    Point Balance: A statement prepared by futures commission merchants to show profit or loss on all open contracts using an official closing or settlement price, usually at calendar month end.

    Ponzi Scheme: Named after Charles Ponzi, a man with a remarkable criminal career in the early 20th century, the term has been used to describe pyramid arrangements whereby an enterprise makes payments to investors from the proceeds of a later investment rather than from profits of the underlying business venture, as the investors expected, and gives investors the impression that a legitimate profit-making business or investment opportunity exists, where in fact it is a mere fiction.

    Pork Bellies: One of the major cuts of the hog carcass that, when cured, becomes bacon.

    Portfolio Insurance: A trading strategy that uses stock index futures and/or stock index options to protect stock portfolios against market declines.

    Portfolio Margining: A method for setting margin requirements that evaluates positions as a group or portfolio and takes into account the potential for losses on some positions to be offset by gains on others. Specifically, the margin requirement for a portfolio is typically set equal to an estimate of the largest possible decline in the net value of the portfolio that could occur under assumed changes in market conditions. Sometimes referred to as risked-based margining. Also see Strategy-Based Margining.

    Position: An interest in the market, either long or short, in the form of one or more open contracts.

    Position Accountability: A rule adopted by an exchange requiring persons holding a certain number of outstanding contracts to report the nature of the position, trading strategy, and hedging information of the position to the exchange, upon request of the exchange. See Speculative Position Limit.

    Position Limit: See Speculative Position Limit.

    Position Trader: A commodity trader who either buys or sells contracts and holds them for an extended period of time, as distinguished from a day trader, who will normally initiate and offset a futures position within a single trading session.

    Positive Carry: The cost of financing a financial instrument (the short-term rate of interest), where the cost is less than the current return of the financial instrument. See Carrying Charges and Negative Carry.

    Posted Price: An announced or advertised price indicating what a firm will pay for a commodity or the price at which the firm will sell it.

    Prearranged Trading: Trading between brokers in accordance with an expressed or implied agreement or understanding, which is a violation of the Commodity Exchange Act and CFTC regulations.

    Premium: (1) The payment an option buyer makes to the option writer for granting an option contract; (2) the amount a price would be increased to purchase a better quality commodity; (3) refers to a futures delivery month selling at a higher price than another, as "July is at a premium over May."

    Price Basing: A situation where producers, processors, merchants, or consumers of a commodity establish commercial transaction prices based on the futures prices for that or a related commodity (e.g., an offer to sell corn at 5 cents over the December futures price). This phenomenon is commonly observed in grain and metal markets.

    Price Discovery: The process of determining the price level for a commodity based on supply and demand conditions. Price discovery may occur in a futures market or cash market.

    Price Movement Limit: See Limit (Up or Down).

    Primary Market: (1) For producers, their major purchaser of commodities; (2) to processors, the market that is the major supplier of their commodity needs; and (3) in commercial marketing channels, an important center at which spot commodities are concentrated for shipment to terminal markets.

    Program Trading: The purchase (or sale) of a large number of stocks contained in or comprising a portfolio. Originally called program trading when index funds and other institutional investors began to embark on large-scale buying or selling campaigns or "programs" to invest in a manner that replicates a target stock index, the term now also commonly includes computer-aided stock market buying or selling programs, and index arbitrage.

    Prompt Date: The date on which the buyer of an option will buy or sell the underlying commodity (or futures contract) if the option is exercised.

    Prop Shop: A proprietary trading group, especially one where the group's traders trade electronically at a physical facility operated by the group.

    Proprietary Trading Account: An account that a futures commission merchant carries for itself or a closely related person, such as a parent, subsidiary or affiliate company, general partner, director, associated person, or an owner of 10 percent or more of the capital stock. The FCM must segregate customer funds from funds related to proprietary accounts.

    Proprietary Trading Group: An organization whose owners, employees, and/or contractors trade in the name of accounts owned by the group and exclusively use the funds of the group for all of their trading activity.

    Public: In trade parlance, non-professional speculators as distinguished from hedgers and professional speculators or traders.

    Public Elevators: Grain elevators in which bulk storage of grain is provided to the public for a fee. Grain of the same grade but owned by different persons is usually mixed or commingled as opposed to storing it "identity preserved." Some elevators are approved by exchanges as regular for delivery on futures contracts, see Regular Warehouse.

    Purchase and Sale Statement: See P&S.

    Put Option: An option contract that gives the holder the right but not the obligation to sell a specified quantity of a particular commodity or other interest at a given price (the "strike price") prior to or on a future date.

    Pyramiding: The use of profits on existing positions as margin to increase the size of the position, normally in successively smaller increments.


    Qualified Eligible Person (QEP): The definition of QEP is too complex to summarize here; please see CFTC Regulation 4.7(a)(2) and (a)(3), 17 CFR 4.7(a)(2) and (a)(3), for the full definition.

    Quick Order: See Fill or Kill Order.

    Quotation: The actual price or the bid or ask price of either cash commodities or futures contracts.

    Rally: An upward movement of prices.

    Random Walk: An economic theory that market price movements move randomly. This assumes an efficient market. The theory also assumes that new information comes to the market randomly. Together, the two assumptions imply that market prices move randomly as new information is incorporated into market prices. The theory implies that the best predictor of future prices is the current price, and that past prices are not a reliable indicator of future prices. If the random walk theory is correct, technical analysis cannot work.

    Range: The difference between the high and low price of a commodity, futures, or option contract during a given period.

    Ratio Hedge: The number of options compared to the number of futures contracts bought or sold in order to establish a hedge that is neutral or delta neutral.

    Ratio Spread: This strategy, which applies to both puts and calls, involves buying or selling options at one strike price in greater number than those bought or sold at another strike price. Ratio spreads are typically designed to be delta neutral. Back spreads and front preads are types of ratio spreads.

    Ratio Vertical Spread: See Front Spread.

    Reaction: A downward price movement after a price advance.

    Recovery: An upward price movement after a decline.

    Reference Asset: An asset, such as a corporate or sovereign debt instrument, that underlies a credit derivative.

    Regular Warehouse: A processing plant or warehouse that satisfies exchange requirements for financing, facilities, capacity, and location and has been approved as acceptable for delivery of commodities against futures contracts. See Licensed Warehouse.

    Replicating Portfolio: A portfolio of assets for which changes in value match those of a target asset. For example, a portfolio replicating a standard option can be constructed with certain amounts of the asset underlying the option and bonds. Sometimes referred to as a synthetic asset.

    Repo or Repurchase Agreement: A transaction in which one party sells a security to another party while agreeing to repurchase it from the counterparty at some date in the future, at an agreed price. Repos allow traders to short-sell securities and allow the owners of securities to earn added income by lending the securities they own. Through this operation the counterparty is effectively a borrower of funds to finance further. The rate of interest used is known as the repo rate.

    Reporting Level: Sizes of positions set by the exchanges and/or the CFTC at or above which commodity traders or brokers who carry these accounts must make daily reports about the size of the position by commodity, by delivery month, and whether the position is controlled by a commercial or non-commercial trader. See the Large Trader Reporting Program.

    Resistance: In technical analysis, a price area where new selling will emerge to dampen a continued rise. See Support.

    Resting Order: A limit order to buy at a price below or to sell at a price above the prevailing market that is being held by a floor broker. Such orders may either be day orders or open orders.

    Retail Customer: A customer that does not qualify as an eligible contract participant under Section 1a(12) of the Commodity Exchange Act, 7 USC 1a(12). An individual with total assets that do not exceed $10 million, or $5 million if the individual is entering into an agreement, contract, or transaction to manage risk, would be considered a retail customer.

    Retender: In specific circumstances, some exchanges permit holders of futures contracts who have received a delivery notice through the clearing organization to sell a futures contract and return the notice to the clearing organization to be reissued to another long; others permit transfer of notices to another buyer. In either case, the trader is said to have retendered the notice.

    Retracement: A reversal within a major price trend.

    Reversal: A change of direction in prices. See Reverse Conversion.

    Reverse Conversion or Reversal: With regard to options, a position created by buying a call option, selling a put option, and selling the underlying instrument (for example, a futures contract). See Conversion.

    Reverse Crush Spread: The sale of soybean futures and the simultaneous purchase of soybean oil and meal futures. See Crush Spread.

    Riding the Yield Curve: Trading in an interest rate futures contract according to the expectations of change in the yield curve.

    Ring: A circular area on the trading floor of an exchange where traders and brokers stand while executing futures trades. Some exchanges use pits rather than rings.

    Risked-Based Margining: See Portfolio Margining.

    Risk Factor: See Delta.

    Risk/Reward Ratio: The relationship between the probability of loss and profit. This ratio is often used as a basis for trade selection or comparison.

    Roll-Over: A trading procedure involving the shift of one month of a straddle into another future month while holding the other contract month. The shift can take place in either the long or short straddle month. The term also applies to lifting a near futures position and re-establishing it in a more deferred delivery month.

    Round Lot: A quantity of a commodity equal in size to the corresponding futures contract for the commodity. See Even Lot.

    Round Trip Trading: See Wash Trading.

    Round Turn: A completed transaction involving both a purchase and a liquidating sale, or a sale followed by a covering purchase.

    Rules: The principles for governing an exchange. In some exchanges, rules are adopted by a vote of the membership, while in others, they can be imposed by the governing board.

    Runners: Messengers or clerks who deliver orders received by phone clerks to brokers for execution in the pit.


    Sample Grade: Usually the lowest quality of a commodity, too low to be acceptable for delivery in satisfaction of futures contracts.

    Scale Down or Scale Up: To purchase or sell a scale down means to buy or sell at regular price intervals in a declining market. To buy or sell on scale up means to buy or sell at regular price intervals as the market advances.

    Scalper: A speculator on the trading floor of an exchange who buys and sells rapidly, with small profits or losses, holding his positions for only a short time during a trading session. Typically, a scalper will stand ready to buy at a fraction below the last transaction price and to sell at a fraction above, e.g., to buy at the bid and sell at the offer or ask price, with the intent of capturing the spread between the two, thus creating market liquidity. See Day Trader, Position Trader.

    Seasonality Claims: Misleading sales pitches that one can earn large profits with little risk based on predictable seasonal changes in supply or demand, published reports or other well-known events.

    Seat: An instrument granting trading privileges on an exchange. A seat may also represent an ownership interest in the exchange.

    Securities and Exchange Commission (SEC): The Federal regulatory agency established in 1934 to administer Federal securities laws.

    Security: Generally, a transferable instrument representing an ownership interest in a corporation (equity security or stock) or the debt of a corporation, municipality, or sovereign. Other forms of debt such as mortgages can be converted into securities. Certain derivatives on securities (e.g., options on equity securities) are also considered securities for the purposes of the securities laws. Security futures products are considered to be both securities and futures products. Futures contracts on broad-based securities indexes are not considered securities.

    Security Deposit: See Margin.

    Security Future: A contract for the sale or future delivery of a single security or of a narrow-based security index.

    Security Futures Product: A security future or any put, call, straddle, option, or privilege on any security future.

    Self-Regulatory Organization (SRO): Exchanges and registered futures associations that enforce financial and sales practice requirements for their members. See Designated Self-Regulatory Organizations.

    Seller's Call: Seller's call, also referred to as call purchase, is the same as the buyer's call except that the seller has the right to determine the time to fix the price. See Buyer’s Call.

    Seller's Market: A condition of the market in which there is a scarcity of goods available and hence sellers can obtain better conditions of sale or higher prices. See Buyer's Market.

    Seller's Option: The right of a seller to select, within the limits prescribed by a contract, the quality of the commodity delivered and the time and place of delivery.

    Selling Hedge (or Short Hedge): Selling futures contracts to protect against possible decreased prices of commodities. See Hedging.

    Series (of Options): Options of the same type (i.e., either puts or calls, but not both), covering the same underlying futures contract or other underlying instrument, having the same strike price and expiration date.

    Settlement: The act of fulfilling the delivery requirements of the futures contract.

    Settlement Price: The daily price at which the clearing organization clears all trades and settles all accounts between clearing members of each contract month. Settlement prices are used to determine both margin calls and invoice prices for deliveries. The term also refers to a price established by the exchange to even up positions which may not be able to be liquidated in regular trading.

    Shipping Certificate: A negotiable instrument used by several futures exchanges as the futures delivery instrument for several commodities (e.g., soybean meal, plywood, and white wheat). The shipping certificate is issued by exchange-approved facilities and represents a commitment by the facility to deliver the commodity to the holder of the certificate under the terms specified therein. Unlike an issuer of a warehouse receipt, who has physical product in store, the issuer of a shipping certificate may honor its obligation from current production or through-put as well as from inventories.

    Shock Absorber: A temporary restriction in the trading of certain stock index futures contracts that becomes effective following a significant intraday decrease in stock index futures prices. Designed to provide an adjustment period to digest new market information, the restriction bars trading below a specified price level. Shock absorbers are generally market specific and at tighter levels than circuit breakers.

    Short: (1) The selling side of an open futures contract; (2) a trader whose net position in the futures market shows an excess of open sales over open purchases. See Long.

    Short Covering: See Cover.

    Short Hedge: See Selling Hedge.

    Short Selling: Selling a futures contract or other instrument with the idea of delivering on it or offsetting it at a later date.

    Short Squeeze: See Squeeze.

    Short the Basis: The purchase of futures as a hedge against a commitment to sell in the cash or spot markets. See Hedging.

    Single Stock Future: A futures contract on a single stock. Single stock futures were illegal in the U.S. prior to the passage of the Commodity Futures Modernization Act. See Security Future, Security Futures Product.

    Small Traders: Traders who hold or control positions in futures or options that are below the reporting level specified by the exchange or the CFTC.

    Soft: (1) A description of a price that is gradually weakening; or (2) this term also refers to certain “soft” commodities such as sugar, cocoa, and coffee.

    Sold-Out-Market: When liquidation of a weakly-held position has been completed, and offerings become scarce, the market is said to be sold out.

    SPAN® (Standard Portfolio Analysis of Risk®): As developed by the Chicago Mercantile Exchange, the industry standard for calculating performance bond requirements (margins) on the basis of overall portfolio risk. SPAN calculates risk for all enterprise levels on derivative and non-derivative instruments at numerous exchanges and clearing organizations worldwide.

    Spark Spread: The differential between the price of electricity and the price of natural gas or other fuel used to generate electricity, expressed in equivalent units. See Gross Processing Margin.

    Specialist System: A type of trading commonly used for the exchange trading of securities in which one individual or firm acts as a market-maker in a particular security, with the obligation to provide fair and orderly trading in that security by offsetting temporary imbalances in supply and demand by trading for the specialist’s own account. See Open Outcry.

    Speculative Bubble: A rapid run-up in prices caused by excessive buying that is unrelated to any of the basic, underlying factors affecting the supply or demand for a commodity or other asset. Speculative bubbles are usually associated with a "bandwagon" effect in which speculators rush to buy the commodity (in the case of futures, "to take positions") before the price trend ends, and an even greater rush to sell the commodity (unwind positions) when prices reverse.

    Speculative Limit: See Speculative Position Limit.

    Speculative Position Limit: The maximum position, either net long or net short, in one commodity future (or option) or in all futures (or options) of one commodity combined that may be held or controlled by one person (other than a person eligible for a hedge exemption) as prescribed by an exchange and/or by the CFTC.

    Speculator: In commodity futures, an individual who does not hedge, but who trades with the objective of achieving profits through the successful anticipation of price movements.

    Split Close: A condition that refers to price differences in transactions at the close of any market session.

    Spot Market: Market of immediate delivery of and payment for the product.

    Spot Commodity: (1) The actual commodity as distinguished from a futures contract; (2) sometimes used to refer to cash commodities available for immediate delivery. See Actuals or Cash Commodity.

    Spot Month: The futures contract that matures and becomes deliverable during the present month. Also called Current Delivery Month.

    Spot Price: The price at which a physical commodity for immediate delivery is selling at a given time and place. See Cash Price.

    Spread (or Straddle): The purchase of one futures delivery month against the sale of another futures delivery month of the same commodity; the purchase of one delivery month of one commodity against the sale of that same delivery month of a different commodity; or the purchase of one commodity in one market against the sale of the commodity in another market, to take advantage of a profit from a change in price relationships. The term spread is also used to refer to the difference between the price of a futures month and the price of another month of the same commodity. A spread can also apply to options. See Arbitrage.

    Squeeze: A market situation in which the lack of supplies tends to force shorts to cover their positions by offset at higher prices. Also see Congestion, Corner.

    SRO: See Self-Regulatory Organization.

    Stop-Close-Only Order: A stop order that can be executed, if possible, only during the closing period of the market. See also Market-on-Close Order.

    Stop Limit Order: A stop limit order is an order that goes into force as soon as there is a trade at the specified price. The order, however, can only be filled at the stop limit price or better.

    Stop Loss Order: See Stop Order.

    Stop Order: This is an order that becomes a market order when a particular price level is reached. A sell stop is placed below the market, a buy stop is placed above the market. Sometimes referred to as stop loss order. Compare to market-if-touched order.

    Straddle: (1) See Spread; (2) an option position consisting of the purchase of put and call options having the same expiration date and strike price.

    Strangle: An option position consisting of the purchase of put and call options having the same expiration date, but different strike prices.

    Strategy-Based Margining: A method for setting margin requirements whereby the potential for gains on one position in a portfolio to offset losses on another position is taken into account only if the portfolio implements one of a designated set of recognized trading strategies as set out in the rules of an exchange or clearing organization. Also see Portfolio Margining.

    Street Book: A daily record kept by futures commission merchants and clearing members showing details of each futures and option transaction, including date, price, quantity, market, commodity, future, strike price, option type, and the person for whom the trade was made.

    Strike Price (Exercise Price): The price, specified in the option contract, at which the underlying futures contract, security, or commodity will move from seller to buyer.

    STRIPS (Separate Trading of Registered Interest and Principal Securities): A book-entry system operated by the Federal Reserve permitting separate trading and ownership of the principal and coupon portions of selected Treasury securities. It allows the creation of zero coupon Treasury securities from designated whole bonds.

    Strong Hands: When used in connection with delivery of commodities on futures contracts, the term usually means that the party receiving the delivery notice probably will take delivery and retain ownership of the commodity; when used in connection with futures positions, the term usually means positions held by trade interests or well-financed speculators.

    Support: In technical analysis, a price area where new buying is likely to come in and stem any decline. See Resistance.

    Swap: In general, the exchange of one asset or liability for a similar asset or liability for the purpose of lengthening or shortening maturities, or raising or lowering coupon rates, to maximize revenue or minimize financing costs. This may entail selling one securities issue and buying another in foreign currency; it may entail buying a currency on the spot market and simultaneously selling it forward. Swaps also may involve exchanging income flows; for example, exchanging the fixed rate coupon stream of a bond for a variable rate payment stream, or vice versa, while not swapping the principal component of the bond. Swaps are generally traded over-the-counter.

    Swaption: An option to enter into a swap—i.e., the right, but not the obligation, to enter into a specified type of swap at a specified future date.

    Switch: Offsetting a position in one delivery month of a commodity and simultaneous initiation of a similar position in another delivery month of the same commodity, a tactic referred to as "rolling forward."

    Synthetic Futures: A position created by combining call and put options. A synthetic long futures position is created by combining a long call option and a short put option for the same expiration date and the same strike price. A synthetic short futures contract is created by combining a long put and a short call with the same expiration date and the same strike price.

    Systematic Risk: Market risk due to factors that cannot be eliminated by diversification.

    Systemic Risk: The risk that a default by one market participant will have repercussions on other participants due to the interlocking nature of financial markets. For example, Customer A’s default in X market may affect Intermediary B’s ability to fulfill its obligations in Markets X, Y, and Z.

  • Futures and Options Glossary T - Z


    Taker: The buyer of an option contract.

    T-Bond: See Treasury Bond.

    Technical Analysis: An approach to forecasting commodity prices that examines patterns of price change, rates of change, and changes in volume of trading and open interest, without regard to underlying fundamental market factors. Technical analysis can work consistently only if the theory that price movements are a random walk is incorrect. See Fundamental Analysis.

    Ted Spread: The difference between the price of the three-month U.S. Treasury bill futures contract and the price of the three-month Eurodollar time deposit futures contract with the same expiration month.

    Tender: To give notice to the clearing organization of the intention to initiate delivery of the physical commodity in satisfaction of a short futures contract. Also see Retender.

    Tenderable Grades: See Contract Grades.

    Terminal Elevator: An elevator located at a point of greatest accumulation in the movement of agricultural products that stores the commodity or moves it to processors.

    Terminal Market: Usually synonymous with commodity exchange or futures market, specifically in the United Kingdom.

    Tick: Refers to a minimum change in price up or down. An up-tick means that the last trade was at a higher price than the one preceding it. A down-tick means that the last price was lower than the one preceding it. See Minimum Price Fluctuation.

    Time Decay: The tendency of an option to decline in value as the expiration date approaches, especially if the price of the underlying instrument is exhibiting low volatility. See Time Value.

    Time-of-Day Order: This is an order that is to be executed at a given minute in the session. For example, "Sell 10 March corn at 12:30 p.m."

    Time Spread: The selling of a nearby option and buying of a more deferred option with the same strike price. Also called Horizontal Spread.

    Time Value: That portion of an option's premium that exceeds the intrinsic value. The time value of an option reflects the probability that the option will move into-the-money. Therefore, the longer the time remaining until expiration of the option, the greater its time value. Also called Extrinsic Value.

    Total Return Swap: A type of credit derivative in which one counterparty receives the total return (interest payments and any capital gains or losses) from a specified reference asset and the other counterparty receives a specified fixed or floating cash flow that is not related to the creditworthiness of the reference asset. Also called total rate of return swap, or TR swap.

    To-Arrive Contract: A transaction providing for subsequent delivery within a stipulated time limit of a specific grade of a commodity.

    Trade Option: A commodity option transaction in which the purchaser is reasonably believed by the writer to be engaged in business involving use of that commodity or a related commodity.

    Trader: (1) A merchant involved in cash commodities; (2) a professional speculator who trades for his own account and who typically holds exchange trading privileges.

    Trading Ahead: See Front Running.

    Trading Arcade: A facility, often operated by a clearing member that clears trades for locals, where e-locals who trade for their own account can gather to trade on an electronic trading facility (especially if the exchange is all-electronic and there is no pit or ring).

    Trading Facility: A person or group of persons that provides a physical or electronic facility or system in which multiple participants have the ability to execute or trade agreements, contracts, or transactions by accepting bids and offers made by other participants in the facility or system. See Many-to-Many.

    Trading Floor: A physical trading facility where traders make bids and offers via open outcry or the specialist system.

    Transaction: The entry or liquidation of a trade.

    Transfer Trades: Entries made upon the books of futures commission merchants for the purpose of: (1) transferring existing trades from one account to another within the same firm where no change in ownership is involved; (2) transferring existing trades from the books of one FCM to the books of another FCM where no change in ownership is involved. Also called Ex-Pit transactions.

    Transferable Option (or Contract): A contract that permits a position in the option market to be offset by a transaction on the opposite side of the market in the same contract.

    Transfer Notice: A term used on some exchanges to describe a notice of delivery. See Retender.

    Treasury Bills (or T-Bills): Short-term zero coupon U.S. government obligations, generally issued with various maturities of up to one year.

    Treasury Bonds (or T-Bonds): Long-term (more than ten years) obligations of the U.S. government that pay interest semiannually until they mature, at which time the principal and the final interest payment is paid to the investor.

    Treasury Notes: Same as Treasury bonds except that Treasury notes are medium-term (more than one year but not more than ten years).

    Trend: The general direction, either upward or downward, in which prices have been moving.

    Trendline: In charting, a line drawn across the bottom or top of a price chart indicating the direction or trend of price movement. If up, the trendline is called bullish; if down, it is called bearish.


    Unable: All orders not filled by the end of a trading day are deemed “unable” and void, unless they are designated GTC (Good Until Canceled) or open.

    Uncovered Option: See Naked Option.

    Underlying Commodity: The cash commodity underlying a futures contract. Also, the commodity or futures contract on which a commodity option is based, and which must be accepted or delivered if the option is exercised.

    Variable Price Limit: A price limit schedule, determined by an exchange, that permits variations above or below the normally allowable price movement for any one trading day.

    Variation Margin: Payment made on a daily or intraday basis by a clearing member to the clearing organization based on adverse price movement in positions carried by the clearing member, calculated separately for customer and proprietary positions.

    Vault Receipt: A document indicating ownership of a commodity stored in a bank or other depository and frequently used as a delivery instrument in precious metal futures contracts.

    Vega: Coefficient measuring the sensitivity of an option value to a change in volatility.

    Vertical Spread: Any of several types of option spread involving the simultaneous purchase and sale of options of the same class and expiration date but different strike prices, including bull vertical spreads, bear vertical spreads, back spreads, and front spreads. See Horizontal Spread and Diagonal Spread.

    Visible Supply: Usually refers to supplies of a commodity in licensed warehouses. Often includes floats and all other supplies "in sight" in producing areas. See Invisible Supply.

    Volatility: A statistical measurement of the rate of price change of a futures contract, security, or other instrument underlying an option. See Historical Volatility, Implied Volatility.

    Volatility Quote Trading: Refers to the quoting of bids and offers on option contracts in terms of their implied volatility rather than as prices.

    Volatility Spread: A delta-neutral option spread designed to speculate on changes in the volatility of the market rather than the direction of the market.

    Volatility Trading: Strategies designed to speculate on changes in the volatility of the market rather than the direction of the market.

    Volume of Trade: The number of contracts traded during a specified period of time. It may be quoted as the number of contracts traded or as the total of physical units, such as bales or bushels, pounds or dozens.


    Warehouse Receipt: A document certifying possession of a commodity in a licensed warehouse that is recognized for delivery purposes by an exchange.

    Warrant: An issuer-based product that gives the buyer the right, but not the obligation, to buy (in the case of a call) or to sell (in the case of a put) a stock or a commodity at a set price during a specified period.

    Warrant or Warehouse Receipt for Metals: Certificate of physical deposit, which gives title to physical metal in an exchange-approved warehouse.

    Wash Sale: See Wash Trading.

    Wash Trading: Entering into, or purporting to enter into, transactions to give the appearance that purchases and sales have been made, without incurring market risk or changing the trader's market position. The Commodity Exchange Act prohibits wash trading. Also called Round Trip Trading, Wash Sales.

    Weak Hands: When used in connection with delivery of commodities on futures contracts, the term usually means that the party probably does not intend to retain ownership of the commodity; when used in connection with futures positions, the term usually means positions held by small speculators.

    Weather Derivative: A derivative whose payoff is based on a specified weather event, for example, the average temperature in Chicago in January. Such a derivative can be used to hedge risks related to the demand for heating fuel or electricity.

    Wild Card Option: Refers to a provision of any physical delivery Treasury bond or Treasury notes futures contract that permits shorts to wait until as late as 8:00 p.m. on any notice day to announce their intention to deliver at invoice prices that are fixed at 2:00 p.m., the close of futures trading, on that day.

    Winter Wheat: Wheat that is planted in the fall, lies dormant during the winter, and is harvested beginning about May of the next year.

    Writer: The issuer, grantor, or seller of an option contract.

    Yield Curve: A graphic representation of market yield for a fixed income security plotted against the maturity of the security. The yield curve is positive when long-term rates are higher than short-term rates.

    Yield to Maturity: The rate of return an investor receives if a fixed income security is held to maturity.

    Zero Coupon: Refers to a debt instrument that does not make coupon payments, but, rather, is issued at a discount to par and redeemed at par at maturity.

  • Futures market volatility is abundant with payroll data and earnings around the corner.

    the financial futures report

    Investors are on edge ahead of event risk

    Thus far the summer of 2016 has been highly volatile, and we don't see any signs of this changing anytime soon. From grains, to energies, to currencies and, of course, the financials, there have been fortunes made and lost in the markets. We suspect this trend will continue well into the fall months. Accordingly, it is generally a good idea to try to keep speculative bets on the small side.

    Risk-off assets such as Treasuries and gold are highly overextended despite the fact that equity market are hovering at relatively lofty levels. In our view, this offers a glimpse into the minds of investors; it is clear they are far from comfortable with the current environment. We can't blame them; we've yet to resolve the Brexit vote implications and we will soon be forced to endure the latest US employment report and, more important, it's potential impact on the Fed's interest rate policy. Soon after, the second quarter earnings season will roll out. With all of this in mind, it might be worth unloading some risk where possible.

  • Futures markets are recalibrating to China, but most of the pain is probably over

    the financial futures report

    Holiday futures markets didn't disappoint, but the Santa Claus rally did

    As is almost always the case, thinly traded holiday markets made for some exciting trades. Perhaps they were most exciting for those on the sidelines watching from afar. A smart colleague summed up his trading in December with the following statement, "The holiday markets giveth, then they taketh away...and then some."

    Volume on Monday was on the skimpy side as traders were still enjoying the holiday environment, but China essentially forced traders back to the markets. The Chinese government quietly implemented circuit breaker rules that forced the Chinese stock market to halt trading for two sessions in a row. In fact, today's session (which occurred last night for us) lasted only minutes before trade was halted.

    Failure of the Chinese government to allow the markets to properly react to market conditions triggered a global sell-off. At times like this it is important to remember that the Chinese stock market is in its infancy, and is being regulated by an entity that detests capitalism. Nevertheless, they seem to be learning that markets cannot be controlled. The circuit breakers will be bypassed on tonight's market open. In our opinion, this is a big step toward stabilization; after all, with circuit breakers in place buyers were not allowed to step in to cushion the fall.

  • Getting Started in Interest Rate Futures

    Interest Rate FuturesCalculating Profit and Loss in Interest Rate Futures

    As you have likely discovered, the term commodity can be used to describe a wide array of assets. The formal definition of a commodity is a physical substance or asset that is “interchangeable” in trade. From a more general standpoint, a commodity is any product that trades on a futures exchange. Along with grains such as corn and wheat, commodities also come in the form of financial assets such as interest rate products and currencies. Just as you wouldn’t prefer one bar of gold over another, you likely wouldn’t have a preference between one T-bill over another. The Chicago Board of Trade (CBOT) division of the CME Group futures exchange has recognized this; therefore the CBOT exchange offers standardized contracts to represent each of the government issued fixed income securities known as Treasuries. Similarly, the Chicago Mercantile Exchange division of the CME Group, offers futures trading in a short term interest rate product known as a Eurodollar.

    There are several widely traded contracts in the realm of interest rate futures trading. Each of these futures contracts carry slightly differing market characteristics, and in some cases contract sizes, point values, etc. For those unfamiliar with the futures markets, these discrepancies can be overwhelming. However, I hope to deliver the pertinent information clearly in order to make your journey into financial futures trading as pleasant as possible.

    Before we cover the basic specifications of each contract, it is important to be aware of a few facts regarding Treasury bond valuation. First, longer maturities will react quicker and more violently to changes in interest rates than shorter maturities. Additionally, the value of a bond (the price in which it is trading) is inversely correlated with interest rates or yields. Accordingly, if interest rates go up bond price will drop and vice versa. Keep these points in mind as you review the details of each contract; it will help you to determine which avenue best suits your risk tolerance and personality.

    Interest Rate Futures

    Treasury Futures

    Several years ago the 30-year Treasury bond was the primary interest rate product traded on the Chicago Board of Trade (CBOT). During its prime, it was considered the only Treasury futures contract for experienced commodity traders to involve themselves with. However, the Federal Reserve’s failure to issue new 30-Year bond contracts on a regular basis has worked against the popularity of the contract. In the meantime, shorter maturities such as the 10-Year note benefited in terms of volume and open interest.

    Similar to the other financial futures contracts, all interest rate products are on a quarterly cycle. This means that there are four differing expiration months based on a calendar year. Thos months are; March, June, September and December.

    30-Year T-Bond Futures

    Symbol: ZB

    The 30-year bond is often referred to as the long bond due to its lengthy maturity and its spot on the infamous yield curve. You might also know it simply as “the bond” as other Treasury issues are known as Notes or Bills (to be discussed later).

    The face value of a T-Bond at maturity is $100,000; therefore the contract size of one futures contract with the 30-year Treasury bond as an underlier is also $100,000. Knowing this, it is easy to see that a contract can be looked at as 1,000 points, or trading handles, worth $1,000 a piece. What is unlikely to be obvious is that each full point or handle can then be looked at as a fraction. In trading, the term handle is used to describe the stem of a quote. This usage began in reference to currency futures to describe a penny move. For example, if the Euro rallies from 131.00 to 132.00, some may say that it has moved a handle. In the case of the 30-year Treasury futures, a rally from 156’0 to 157’0 is equivalent to a price increase of one handle.

    The discussion of the relationship between Treasury futures prices and interest rates is to extensive to be included here, but to clarify pricing here is a general explanation of the relationship between the current Treasury price relative to it’s par value. If a futures contract is trading in excess of its par value of 100’0, interest rates have gone down since the issuance of the underlying Treasury securities. If the futures contract is trading below par, interest rates have gone up.P&L Calculations in Interest Rate Futures

    The long bond trades in fractions of a full point; specifically, ticks equivalent to 1/32 of a full point or $31.25 figured by dividing $1,000 by 32. Treasury bond futures are quoted in handles, and fractions of a handle. Further, by the number of full points (worth $1,000) and an incremental fraction of such. Thus a typical bond quote may be 152-24. This is read as 152 handles and 24/32nds. At this quote, the futures contract has a value of $152,750. This is calculated by multiplying 152 by $1000 and 24 by the tick value of $31.25.

    If you are comfortable with the idea of adding and subtracting fractions you will be able to easily calculate profit, loss and risk in Treasury futures. For those that are “fractionally” challenged, you may want to trade Eurodollars which are valued in decimals and will be discussed subsequently. However, I am confident that everyone will quickly become proficient bond futures calculations after looking at the examples below.

    Reading the contract size and point value likely isn’t going to help you to remember or even understand bond futures pricing but looking at a few examples should add some clarity to the details. If a commodity trader goes long a September bond futures contract at 155’22 and is later able to sell the at 156’24 would be profitable by 1’02 or 1 2/32. In dollar terms this is equivalent to $1,062.50 ((1 x $1,000) + (2 x $31.25)).

    The multiplication is relatively standard but people tend to be unjustifiably intimidated by fractions. If you recall the concept of borrowing, you will be fine. In the example above, it wasn’t necessary to borrow. You could have simply subtracted the numerator (top number in fraction) of the buy price from the numerator of the sell price and multiplied the result by $31.25. Likewise, you would have subtracted the handle of the buy price from the handle of the sell price and multiplied the result by $1,000.

    24/32 – 22/32 = 2/32, 2 x $31.25 = $62.50

    156 – 155 = 1 x $1,000 = $1,000

    Total Gain = $1,000 + $62.50 = $1,062.50 minus commissions and fees

    The math isn’t always this convenient. There will be times in which you will need to borrow from the handle to bring the fraction to a level in which you can properly figure the profit or loss. For example, a trader that sells a September bond futures contract at 158’12 and buys the contract back at 156’27 may have a difficult time calculating her trading profit. In this case it is easy to see that the trade was profitable. We know this because the handle at the time of the sell was 118 and the buy was 116 but unless you have been doing this for a while it will take a little work to derive the exact figure.

    The denominator of the sell price, 12, is much smaller than the denominator of the buy price, 27. Therefore we know that we must borrow from the handle to properly net the fractions. In this example, we could reduce the selling price handle to 157 and increase the fraction by 32/32nds. Thus, the new selling price is 157’44. This is a number that can be easily worked with.

    44/32 – 27/32 = 17/32, 17 x $31.25 = $531.25

    157 – 156 = 1 x $1,000 = $1,000

    Total Profit = $1,531.25 minus commissions and fees

    The purpose of these examples is to give you an idea of how T-Bond futures traders can calculate their trading results. Obviously, not all bond futures trades or traders will make money.


    10-Year Note Futures

    Symbol: ZN

    The 10-year note futures, or simply “the note”, has many similarities to the 30-year bond futures contract. The contract size and the point value are all common characteristics. Similarly, if you were able to come to peace with the 30-year bond futures calculations the 10-year note won’t be an issue.

    To reiterate, the contract size of the note is $100,000 which is split into 1,000 handles equivalent to $1,000 and a tick value of 1/32nds or $31.25. Unlike the 30-year bond futures contract, the T-note trades in half ticks (.5/32) valued at $15.625.

    Calculating profit, loss and risk in the 10-year note is identical to that of the 30-year bond. To demonstrate, if a trader goes short the 10-year note futures from 123’29.5 and places a buy stop to protect him from an adverse move at 125’15.0 the risk on the trade would be 1’17.5 or 1,546.87. This is calculated by subtracting the entrance price of the short from the potential fill price of the buy stop at 125’15.0. Once again, the math requires borrowing from the handle in order to properly subtract the fractions. This is done by adjusting the stop price from 125’15.0 to 124’47 ((125 – 1) + (15/32 + 32/32)).

    47/32 – 29.5/32 = 17.5/32, 17.5 x $31.25 = $546.87

    124 – 123 = 1, 1 x $1,000 = $1,000

    Total Risk = $1,531.25 plus commissions and fees

    5-Year Note Futures

    The 5-year note futures contract is identical to the T-bond and the 10-year in terms of contract size. Each 5-year note futures contract represents a face value of $100,000 of the underlying security. Once again, the contract is comprised of handles valued at $1,000 and each handle is divided into 32nds. However, in the case of the 5-year note each 32nd is broken into 4 minimum increments. In other words, each 32nd moves in quarter increments or .25/32. If you recall, the 10-year note has a minimum price fluctuation of .5/32, and the 30-year bond has a minimum tick value of 1/32nds. If 1/32 is equal to $31.25, and .5.32 is worth $15.625, then we know that .25/32 must be $7.8125. Nobody said this would be easy. The futures markets can be potentially lucrative but there is no such thing as “easy money”.

    There aren’t any surprises when it comes to 5-year note futures calculations, other than the fact that they trade in quarter ticks. However, this only requires an additional digit to be typed into your calculator as the process remains the same.

    A trader that goes short a 5-year note futures from 119’10.25 and places a limit order to take profits at 117’05.50 will be profitable by 2’04.75 or $2,148.43. This is figured by subtracting the limit order price from the original sell price.

    10.25/32 – 4.75/32 = 4.75/32, 4.75 x $31.25 = $148.43

    119 – 117 = 2, 2 x $1,000 = $2,000

    Total Profit if Limit Order Filled = $2,148.43

    2-Year Note Futures

    The 2-year note futures contract is the “oddball” of the Treasury complex. Unlike the others, this contract has a face value at maturity of $200,000. Thus, the value of a point (handle) is $2,000 and 1/32 is equivalent to $62.50. Like the 5-year note, the minimum tick is a quarter of a 32nd, or simply .25/32. In dollar terms this is $15.625.

    The difference in the face value of the 2-year note relative to the other Treasury futures contracts is due to fact that the U.S. government issues significantly more debt in the 2-year maturity than any of the others. Accordingly, there are more 2-year Treasury notes traded in the underlying cash market. In other words, the CBOT opted to list the contract with a $200,000 maturity face value to provide “economies of scale” for market participants. This translates into saving the hassle of paying an additional commission which is interesting and noble logic for an organization that survives on trading volume.

    Due to diversity in contract size and point value relative to the other Treasury futures, calculating profit and loss in the 2-year note must be slightly adjusted. A trader that is long a September 2 year note futures at 109’11.75 and is later stopped out of the trade at 108’02.25 would have realized a loss of 1’9.5/32 or $2,593.75 (remember, 1/32 = $62.50).

    11.75/32 – 2.25/32 = 9.5/32, 9.5 x $62.50 = 593.75

    109 – 108 = 2, 1 x $2,000 = $2,000

    Total Loss = $2,593.75

    Eurodollar Futures

    Many traders confuse Eurodollars with the Forex currency pair Euro/Dollar. They may sound the same, but that is where the similarities end. A Eurodollar futures contract is written on a 3-month interest vehicle denominated in U.S. dollars but deposited in off-shore banks. In its simplest form it is a Certificate of Deposit located in a foreign bank. Accordingly, the interest rates offered to Eurodollar holders (in the cash market) are relatively low due to the perceived risk of default being minimal.

    Eurodollars are Savings Deposits in Foreign BanksTogether, the CME Eurodollar futures and options and lead the worldwide industry in open interest and based on daily trading volume, Eurodollars are considered the most liquid futures market in the world.

    The contract size of a Eurodollar futures contract is $1,000,000, and similar to the other interest rate futures products, contract expirations are quarterly; March, June, September, December.

    Eurodollar futures are quoted in handles and decimals and are simply an inverse of the corresponding yield. For example, a Eurodollar price of 97.50 implies a yield of 2.5%. This is figured by subtracting the contract price from 100 (100 – 97.50). Clearly, yields can’t go to zero, so we can infer that the Eurodollar will never trade at 100.00. Thus, as the futures price approaches 100.00, you should consider market fundamentals and technical analysis to construct a bearish strategy.

    The point (handle) value of a Eurodollar is $2,500 and the tick value is $25; so a drop from 99.50 to 98.50 equates to a profit or loss of $2,500 per contract. The Eurodollar futures contract has a minimum price movement of a half of a tick, or $12.50 for most months but is a quarter of a tick, $6.25 for the nearest expiring month. This is likely because the near month Eurodollar futures contract doesn’t typically see much in the way of price change. The daily price change in the front month is typically less than 5 ticks, making it a great place for beginning speculators to get their feet wet. However, considered yourself warned, the deferred Eurodollar futures contracts will react more violently to changes in interest rates or climate. If your risk tolerance is low to moderate, stay with the near month.

    Calculating the profit, loss and risk of any given Eurodollar position is different that that of the Treasury complex but is also less cumbersome. Before you begin your calculation, you can simply move the decimal point and multiply each (full) tick by $25. For instance, if a trader buys a December Eurodollar futures contract at 99.085 (99.08 ½) and later sells it at 99.290, the realized profit on the trade would have been 20.5 ticks or $512.50. The mechanics are the same as the other contracts; it is just the point value that differs (but don’t forget to move the decimal two places to the right).

    9929 – 9908.5 = 20.5

    20.5 x $25 = $512.50

    The information included in this article certainly won’t make or break you as a trader, but without familiarity of the basic specifications of the contract that you are trading you aren’t giving yourself a fair shake. After all, awareness and experience may prevent you from becoming emotional or panicky while your hard earned dollars are on the line.

  • Getting Started in Stock Index Futures Trading

    Calculating Profit and Loss in Stock Index FuturesCalculating profit, loss and risk in the stock index futures complex.

    Before Putting Your Money on the Line…You Should Know the Basics. If you are like most people, you work hard for your money and the last thing you want to do is see it evaporate in your trading account. Throughout my journey in the markets, I have yet to find a fool proof way to guarantee profitable trading, but what I am certain of is that you owe it to yourself to fully understand the products and markets that you intend to trade before risking a single dollar. What you will learn from this article is merely a stepping stone to getting started in trading stock index futures, but without fully understanding the basic calculations of profit, loss and risk in the futures markets, you may never lay the foundation necessary to become a successful commodity trader.

    When most people think of the commodity markets, they imagine fields of grain or bars of gold. However, a futures contract may be written on any commodity in which the underlying asset can be considered fungible. The term fungible purely means “interchangeable”, or having the ability to “comingle”, in trade. For example, you wouldn’t prefer to have one bushel of corn over another. According to the Chicago Mercantile Exchange Group, corn is corn as long as it meets the CME Group definition of a deliverable grade.

    Financial products can be thought of in much of the same way. One unit of the S&P 500 index is just as valuable (or not) as the next. Therefore, financial products can also be considered commodities and trade similarly on futures exchanges around the world.

    Don’t make the mistake of assuming because you are familiar with the equity markets, you can automatically apply that knowledge to trading in the future markets. Despite the underlying asset of stock index futures being based on indices which are household names, the manner in which they trade and the risk they pose to traders is dramatically different than their stock market counterparts.

    Stock Index Futures Markets

    In the U.S. there are four primarily traded futures contracts based on domestic stock indices; the Dow Jones Industrial Average (or simply the Dow), NASDAQ 100, Russell 2000, and the S&P 500. There are several other stock index futures available, but as a speculator you want to be where the liquidity is and many of them simply don’t offer that.

    While stock index futures are all highly correlated in price, they have very distinct personalities. As a trader it is vital to be comfortable with the specifics of the futures contracts that you are trading and eventually the price characteristics of the underlying asset itself.


    S&P 500 Futures

    The S&P 500 futures contract traded on the CME, sometimes referred to as the “big board”, represents the widely followed Standard & Poor’s 500 index. This index is seen as a benchmark of large capitalization stocks in the U.S and is the most commonly traded stock Wall Street Bull index futures contract.

    There are currently two versions of the S&P 500 futures contracts traded on the CME division of the Chicago Mercantile Exchange. Although the CME has ceased trading in most open-outcry futures pits on July 1st 2015, to make way for fully electronic execution in the futures markets, the futures exchange opted to keep the full-sized S&P 500 futures contract trading in a pit. Accordingly, traders can opt to execute their S&P 500 futures orders in the open outcry pit using the “big” S&P, or electronically using the e-mini S&P 500 futures contract.

    The full-sized S&P futures contract has a point value of $250 with a minimum tick of .10. Floor brokers often refer to an S&P point as a “dollar”. For every point, or dollar, that the price moves higher or lower a trader will be making or losing $250. Thus, the contract size of the index is calculated by multiplying the index value by $250. For example, if the futures contract is currently trading at 2050.00 then one full sized S&P 500 futures contract is valued at $512,500. Similarly, a trader that goes long an S&P futures contract at 2089.40 and is forced to sell it due to margin trouble at 2053.20 he would have sustained a loss in the amount of 36.2 points or $9,050 plus the commissions paid to get into the trade. Once again, many traders aren’t willing to accept this type of volatility in their trading account and opt for the benefits of the e-mini version of the contract.

    The e-mini S&P 500 is one fifth the size of its full-sized counterpart and unlike the larger version, the minimum tick is a quarter of a point or .25. With that said, the point value is $50 and the contract size is also one fifth the size of the original contract. If the e-mini S&P is trading at 2050.00 the value of the contract would be $102,500. Now that is more like it. An e-mini S&P futures trader is exposed to risk but relative to the “Big Board” contract it is much more controllable. When it comes to leverage, less is sometimes “more”.

    A trader that goes long the e-mini S&P from 2035.00 and is able to sell the position at 2052.25 would have realized a profit of 17.25 points or $862.50. Again, this is figured by subtracting the sale price from the purchase price and multiplying the difference by $50.

    2052.25 – 2035.00 = 17.25

    17.25 x $50 = $862.5


    Dow Jones Industrial Average Futures

    Dow futures are listed and traded on the Chicago Board of Trade (CBOT) division of the Chicago Mercantile Exchange Group. The CBOT’s futures version of the Dow index closely follows the infamous Dow Jones Industrial Average comprised of 30 blue chip stocks.Chicago Mercantile Exchange Group Stock Index Futures

    In the past, the futures exchange provided futures traders with the ability to speculate on the DJIA in three different increments of risk and reward. However, in recent years the product listing has been streamlined a single Dow futures contract to increase efficiency; the mini-sized Dow (futures symbol YM). The DJIA mini-sized futures contract is often referred to in the industry as the “nickel Dow” because each point of movement in the futures market is worth $5 to a trader.

    Unlike some of the true commodity futures contracts, the contract size of a stock index is not fixed. In fact, there is no contract size; instead, the contract value fluctuates with the market and is calculated by multiplying the index value by the point value (which is $5 in the case of the mini Dow futures contract). Accordingly, if the mini-sized Dow futures contract settled the trading day at 17,520 the value of the contract at that particular moment would be $86,250 ($5 x 17,520). Keep in mind that the margin for the mini-sized Dow is far less than $57,600 making it a highly leveraged trading vehicle. Margins are subject to change at any time, but the average seems to be between $4,000 and $5,000. As you can imagine, being responsible for the gains and losses of a contract valued at nearly $90,000 with as little as $4,000 could create large amounts of volatility in your commodity trading account. However, it is this leverage that keeps traders coming back to the futures markets for more. Unfortunately, it is the same leverage that has resulted in many bitter ex-futures traders.

    Calculating profit and loss in the mini-sized Dow is relatively easy. Unlike many other commodities, or even financial futures, the Dow doesn’t trade in fractions or decimals; one tick is simply one point. Consequently, if a trader is long a mini-Dow futures contract from 17,257 and is able to liquidate the trade the next day at 17,348, the realized profit would have been 91 points or $455 (91 x $5). This is figured by subtracting the purchase price from the sale price and multiplying the point difference by $5.

    17,348 – 17,257 = 91

    91 x $5 = $455 (minus commissions and fees)

    Not bad for a day’s work; regrettably, it isn’t always that easy. Had the commodity trader taken the exact opposite position by selling the contract at 17,257 and buying it back at 17,348 the loss would have been $455 plus commissions and fees.


    NASDAQ Futures

    NASDAQ futures are listed on the CME division of the Chicago Mercantile Exchange Group; it closely tracks the NASDAQ 100 index which includes the 100 largest non-financial stocks listed on the NASDAQ stock exchange. Prior to the closure of the futures trading pits at the CME, the exchange provided traders with two alternatives in speculation on the NASDAQ, a full sized contract and an e-mini version. However, the NASDAQ 100 futures contract now only trades in an e-mini version. This is probably a positive development to the retail trading community, because the original NASDAQ futures contract (full-sized), at $100 per point, was too large and volatile for most speculators.

    The e-mini NASDAQ 100 futures contract comes with a point value of $20 (one fifth of the original $100 full-sized contract) reducing the contract size considerably. With the futures market at 4520.00, an e-mini NASDAQ contract is equivalent to $90,400 of the underlying index.

    An e-mini NASDAQ trader long from 4505.50 and subsequently able to sell the position at 4532.75 would have been profitable by 27.25 points or $545. This is figured by subtracting the exit price by the entry price and multiplying the difference by $20.

    4532.75 – 4505.50 = 27.25

    27.25 x $20 = $545 (minus commissions and fees)

    Generally speaking, the e-mini NASDAQ is the tamest speculative vehicle in the stock index futures complex in regard to daily profit and loss per contract held. Further, it also comes with the lowest margin requirement. For this reason, some beginning traders opt to trade the e-mini NASDAQ futures when dipping their toe into the futures arena. With that said, the NASDAQ 100 is far more susceptible to price moves dependent on a single stock (such as Apple) than a broader index such as the S&P 500 futures might be.


    Russell 2000 Mini Futures

    ICE Futures ExchangeThe mini Russell 2000 futures contract trades on the Intercontinental Exchange (ICE Exchange). It is the one and only stock index listed on ICE; consequently, it is also the most treacherous in regard to volatility. The Russell is believed to be a market leader, and it typically is, but sometimes leading the pack of stock index futures means excessive volatility.

    A commodity trader long or short the Russell futures will make or lose $100 per full point of price movement. On an average day, the Russell will see a move from 3 to 8 points but on a volatile day it isn’t out of the question to see 15 to 25 points in price movement. If you’ve done the math in your head, you’ve realized that this equates to $1,500 to $2,500 in profit and loss per contract.

    For instance, a trader that goes short a mini Russell Futures at 1221.00 and places a stop loss order at 1235.00 would be risking 14 points, or $1,400 before commission and fees.
    1235.00 – 1221.00 = 14.00
    14.00 x $100 = $1,400

    If you are looking for a lot of bang for your buck, the Russell might be for you. Nevertheless, the massive and sudden market movements make it a risky venture.

  • Have we finally seen the low in the e-mini S&P 500 futures?

    the financial futures report financial futures trading newsletter

    It has been a busy day in the futures markets, so we will keep things short and sweet.

    I hope anybody watching their futures quote board today had a puke bucket sitting next to their desk. It is becoming difficult to stomach the massive volatility we are seeing in financial and commodity markets; except of course if you happened to catch a ride on the right side of the market. I can honestly say, very few are making money in this environment because it takes nerves of steel and plenty of risk capital to stick with a position long enough to enjoy the benefits. On the other hand, option sellers are having a difficult time managing runaway prices in both futures and options. With all of this said, we are likely near the end of the chaos, at least for now.

    There comes a point in these types of environments in which the speculators either run out of money, gumption, heart, or all of the above. When this happens pricing will get more reasonable in both the futures and the options markets, and volatility will collapse. If I was a gambler, I'd say that inflection point was either today, or at least in the coming session or two.

  • Higher Probability Commodity Trading

    Higher Probability Commodity Trading by Carley Garner



    Barnes & Noble

    Carley Garner, an experienced commodity broker for DeCarley Trading in Las Vegas, has followed up her previous three titles with Higher Probability Commodity Trading, a comprehensive futures and options trading book focused on trading strategy development, commodity market analysis, and much more.  

    The book received rave reviews from some of the top names in the industry, and we are confident you will enjoy it too! Jon Najarian, co-founder of Najarian Family Office and CNBC contributor, believes this book is "A great read for both beginner and advanced commodity traders."  Tobin Smith, CEO & Founder of Transformity Media Inc, and former co-host of Bulls and Bears on Fox News, refers to Higher Probability Commodity Trading as "..an MBA in trading for the price of a few cups of Starbucks!" And Phil Flynn of Fox Business News, has declared "If you are only going to read one book on the futures market this has to be it."


  • How to Create a Synthetic Put

    Synthetic Put Option StrategyHow to create a Synthetic Put

    The term synthetic is often used to describe a manmade object designed to imitate or replicate some other object. Futures and options traders can do the same thing by creating a trading vehicle through a combination of futures and options to replicate another trading instrument. You may be asking yourself; why you would go through the hassle of mimicking an instrument instead of simply trading the original? The answer is simple, as the creator of the vehicle, we can customize it to better suit our needs as well as design it to better take advantage of the underlying market.

    Through the creation of a synthetic position, you can actually decrease your delta as well as, in my opinion, increase the odds of success. Let's take a look at an example of a long synthetic put option.

    Synthetic Long Put Option

    Sell a Futures Contract
    Buy an at-the-money Call Option

    When to Use Synthetic Puts

    • When you are very bearish, but want limited risk
    • The more bearish you are the further from the futures (higher strike price) you can buy, although a true synthetic put involves an at the money call option
    • This position is sometimes used instead of a straight long put due to its flexibility
    • Like the long put this position gives you substantial leverage with unlimited profit potential and limited risk

    Profit Profile of a Synthetic Put Strategy

    • Profit potential is theoretically unlimited
    • At expiration the break-even is equal to the short futures entry price minus the premium paid
    • Each point market goes below the break-even profit increases by a point

    The Risk in Trading Synthetic Puts

    • Your loss limited to the difference between the futures entry prices and call strike price plus the premium paid for the option
    • Your maximum loss occurs if the market is above the option strike price at expiration

    Example of a Synthetic Put Option in the Futures Market:

    A commodity trader looking to profit from a decrease in prices but isn't confident enough in the speculation to sell a futures contract, or even construct an aggressive option spread, might look to a synthetic put.
    A synthetic put option strategy has nearly identical risk and reward potential as an outright put option, making it a potentially expensive proposition. However, if the volatility and premium are right it can be a great way to sell a futures contract, while retaining a piece of mind, and the ability to easily adjust the position because the purchased call option provides an absolute hedge of risk above the strike price.

    A trader that is bearish on the U.S. dollar might opt to sell a dollar index futures contract near 96.60 in hopes of weakness. Should the trader prefer to have limited risk, and be willing to pay an “insurance” premium for protection, might purchase a 97.00 call option for 60 ticks, or $600, because each tick in the dollar index futures and options is worth $10 to a commodity trader.

    Click on image to enlarge.

    With a synthetic put option in place, the trader can sleep at night knowing the worst case scenario is a loss equivalent to the distance between the future entry price and the strike price of the call option, in this case $400 ((97.00-96.60) x $10), plus the cost of the long option purchased to insure the trade, or $600 (60 x $10).

    The payout of this trade at expiration may be identical to a long put option, but the flexibility provided to the trader is unmatched. Unlike a long put, a synthetic long put can be pulled apart prior to expiration in an attempt to capitalize on market moves. Please note that doing so greatly alters the profit and loss diagram.

    An example of an adjustment may be to take a profit on the short futures contract and hold the long call in hopes of a subsequent market rally and the possibility of being profitable on both the futures position and the long option. Or, should the trade go terribly wrong from the beginning a trader may look to take a profit on the long call and hold the short futures in hopes of a reversal. Doing so would eliminate the insurance of the long call and leave the trader open for unlimited risk on the upside, but may be justified if the circumstances are right.

    If you are in search of a commodity options book that features this option trading strategy, and others, visit www.CommodityOptionstheBook.com


  • Is a high consumer confidence reading pointing toward a stock market top?

    Futures Trading Newsletter

    Consumer Confidence at 125...are you kidding me?

    The Conference Board's Consumer Confidence index for the month of March was reported on Tuesday to be 125.6! If I recall, this index bottomed out near 20 as the stock market was making what we now know as a generational low in 2009. I started to type that the March reading was the highest I've ever seen, before noticing that it printed a 128.6 at the end of 2000. In all fairness, I was a clueless college student in 2000 so even if it happened, I probably didn't actually see it.

    The premise behind this index is that consumers are feeling emboldened by a positive view of business, labor market conditions, and the overall economy. On a side note, the survey responsible for this index was taken before the failure of the health care reform bill. Nevertheless, it is clear that consumers are feeling good and as a result, they are putting money to work in the stock market.

    If you look at a long-term chart of the Consumer Confidence index, it almost identically coincides with the direction of the stock market. With this in mind, there could be some red flags waving. In the past, we've seen major tops and bottoms in the stock market at times in which the Consumer Confidence index is at extreme highs and lows, respectively. Particularly readings in excess of 100.

    For instance, the last time the Consumer Confidence was this high in 2000, the S&P peaked dropping 50% over the next two years. Likewise, the Consumer Confidence was near 110 in 2007 just before the S&P fell 60% in the subsequent two years. Since the election, we've seen the Consumer Confidence index breach and hold above 100 for the first time since 2007 (and prior to that the early 2000s). Will this time be different?

    *It is only fair to note that the Consumer Confidence hovered above 100 in the mid-2000s for quite some time before the stock market rolled over and during that time stocks rallied nicely (until they didn't).

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