|
CHAPTER VI - GLOSSARY OF TERMS
A
Abandon. The act of an option holder in electing not to exercise or
offset an option.
At-the-market. An order to buy or sell a futures contract at whatever
price is obtainable when the order reaches the trading floor. Also called
a market order.
At-the-money. An option whose strike price is either equal to or
approximately equal to the current price of the underlying futures contract.
B
Back Months. Those futures delivery months with expiration or delivery
dates furthest into the future; futures delivery months other than the
nearby delivery month.
Bar Chart. The most popular technical tool whereby each day (week,
month or year) is represented by a single vertical bar on a chart. The
bottom of the bar represents the low price, whereas the top of the bar
represents the high price for the time period. A tick mark on the left
side of the bar represents the opening price, while a mark on the right
indicates the closing or settlement price. Trader examine the bar chart
on a regular basis to identify particular patterns, which may help predict
future price direction.
Basic Formula Price (BFP). A monthly milk price for manufactured
grade milk reported by the USDA. The current month's BFP is equal to last
month's MW price plus the change in cheese-butter-prices between last
month and this month. USDA announces the BFP on or before the 5th in the
following month (e.g., the March BFP is announced on April 5th).
Basis. The difference between the current cash price and a futures
price. Basis is normally computed as the cash price minus the futures
price. If basis is quoted as over or under, it refers to the cash price
being over or under the futures price, respectively.
Basis Contract. A cash marketing alternative whereby the buyer
and seller agree upon the basis of the contract. Price is tied to a predetermined
basis and the remaining component of the price (as tied to the futures
market) can be priced anytime prior to when the contract is satisfied
by delivery. This type of cash contract eliminates basis risk but still
has price risk.
Basis Risk. The risk associated with not being able to predict
the basis accurately. Because futures and cash prices tend to move together
over time, basis risk is usually less than price risk.
Bear Market. A market in which prices are declining.
Broker. Someone who executes transactions on an agency basis for
a commission or fee.
Buffer Stocks. Grain stocks available for use to reduce grain price
fluctuations.
Bull Market. A market in which prices are rising.
Buy (or Sell) on Close Order. An order which a trader gives a broker
to buy (or sell) within the closing price range for the day.
Buy (or Sell) on Opening Order. An order which a trader gives a
broker to buy (or sell) within the opening price range for the day.
C
Call Option. An option which gives the option buyer the right, but
not the obligation, to purchase the underlying futures contract at the
strike price on or before the expiration date.
Carrying Charges. The expense involved in storing commodities over
time. Major components include physical storage costs and interest costs,
which represent the opportunity cost of having cash tied up in inventories.
For grains, price differences for futures contact months will reflect
these charges.
Cash Forward Contract. A legal agreement to deliver a fixed quantity
and quality of a commodity, at a specified price to a designated location.
This removes all price risk.
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.
Chicago Board of Trade (CBT). A government licensed futures exchange
that provides grain and oilseed futures contracts (as well as financial
futures) for its members to trade. The CBT is the oldest futures exchange
in the world, being active since the 1850s.
Chicago Mercantile Exchange (CME). A government licensed futures
exchange that provides livestock, financial and dairy futures contracts
for its members to trade. The CME has been around since the late 1900s
when it was known as the Chicago Butter and Egg Exchange.
Clearing House. An adjunct to, or division of, a commodity exchange
through which transactions executed on the floor of the exchange are settled.
Also charged with assuring the proper conduct of the exchange's delivery
procedures and the adequate financing of the trading.
Coffee, Sugar and Cocoa Exchange (CSCE). A government licensed
futures exchange located in New York, NY, that provides coffee, sugar,
cocoa, and dairy futures contracts for its members to trade.
Commercial. An entity involved in the production, processing, or
merchandising of a commodity.
Commission. Fees paid to a broker for executing an order to buy
or sell a futures or options contracts. Fees are usually based on a round-turn
trade and can range from $20 per contract to $100 per contract, depending
on the broker.
Commodity Futures Trading Commission (CFTC). The US government
agency in charge of regulating the futures industry.
Contract Grades. Grades and standards specified in the rules of
an exchange, which must be met to deliver against the futures contract.
These apply to grain futures and in many instances grain meeting different
grades and/or quality standards can be delivered at a premium or a discount.
Contrary Opinion. A technical strategy which trades against prevailing
market opinion. It assumes that the psychology of traders often exaggerates
the incorporation of market news into the market.
Crop Year. See Marketing Year.
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.
D
Day Order. Instructions which a trader gives a broker that will expire
at the end of the day if they are not executed.
Day Trader. A futures trader who initiates and closes his/her position
on the same day.
Deferred Futures Contract. A futures contract with delivery month
that is beyond the nearby futures contract. Also called Back Months.
Deferred Pricing Contract. A cash market contract whereby the buyer
and seller agree to exchange a commodity at a specific date in the future
and a price will be established at some point prior to delivery.
E
Elliott Wave Theory. A technical trading technique which assumes that
prices move in a five-wave sequence with the direction of the main trend,
and in a three-wave sequence during the corrective movements against the
main trend.
Exercise. The action taken by the buyer of a put if he wishes to
sell the underlying futures contract, or by the buyer of a call if he
wishes to buy the underlying contract.
Expiration Date. The last date on which the buyer of an option
may exercise the option. Options expire on a specified date in the month
previous to the delivery month for the underlying futures contract.
Export Inspections. A weekly report issued by USDA stating the
amount of grain and oilseed products that have been inspected for exports
from US ports to foreign destinations.
F
Feed Ratio. The relationship of the cost of feed, expressed as a ratio
to the sale price of animals, such as the corn-milk ratio. These serve
as indicators of the profit margin or lack of profit in feeding animals
to market weight.
Fill or Kill Order. A trading order which demands immediate execution
otherwise it is automatically cancelled.
Floor Broker. A trader on the commodity exchange floor who executes
trades for another person.
Floor Trader. An exchange member who executes his own trades by
being personally present in the pit for futures trading.
Forward Contract. A cash market contract which sets the terms and
conditions of exchanging a commodity, whereby the buyer and seller agree
upon the price when the contract is initiated. The contract is settled
by delivery.
Fundamentals. A term which refers to basic economic (actual or
anticipated supply and demand) factors determining the price of a futures
contract.
Fundamental Analysis. Analysis which utilizes supply and demand
variables to predict a market price.
Futures Contract. A contract, traded on a futures exchange, for
the delivery of a specified commodity. The contract specifies the terms
and conditions of delivery, but can be offset prior to delivery by taking
an opposition position.
G
Good Till Cancelled Order. Instructions which a trader gives a broker,
that remin in effect until the order is either executed or cancelled.
H
Hedge. A position in the futures or options market which is taken
to provide protection against an adverse change in price.
I
In-The-Money. An option that has intrinsic value.
Intrinsic Value. For a put option, the strike price minus the price
of the underlying futures contract, if positive; otherwise, the intrinsic
value is zero. For a call option, the price of the underlying futures
contract minus the strike price, if positive; otherwise, the intrinsic
value is zero.
Inverted Market. A situation where nearby futures contract are
selling at a premium to deferred futures contracts. Hence, the carrying
costs are not reflected in prices.
L
Life of Contract. The period of time from the first to the last trading
day for a particular futures contract.
Limit. The maximum price advance or decline allowed from the previous
day's settlement price for a specific futures contract under exchange
rules.
Limit Order. Instructions which a trader gives a broker to buy
or sell a specific futures or options contract at a specific price or
better.
Liquidity. A market in which selling and buying can be accomplished
with minimal price change.
Long. A position established by the purchase of a futures or options
contract.
Long Hedge. A hedge position taken for protection against rising
prices.
M
Marketing Year. The marketing and production year for individual commodities
designated by the USDA. For corn and soybeans, the marketing year begins
September 1 and ends August 31 of the following year. For wheat, it begins
June 1 and end on May 31 of the following year. The milk marketing year
coincides with the calendar year from January 1 to December 31.
Margin. The amount of money which must be deposited with a broker
to insure performance on a futures or options contract. No margin money
is required from buyers of options contracts. The commodity exchanges
establish minimum margin requirements but brokerage houses may charge
more margin than the minimums established by the exchanges.
Margin Calls. Additional funds which a trader with a futures position
or the seller of an options contract must deposit if there is an adverse
price change or if margin requirements are increased. Margin calls must
be satisfied with wire funds by the start of the following business day
to maintain the futures or options position.
Margin, Initial. The amount of money required by a brokerage house
to establish a futures position or the sale of an options contract.
Margin, Maintenance. The amount of money or equity that must be
on deposit at all times to maintain a futures position or a short option
position. If the amount of equity in an account drops below the maintenance
margin from adverse price changes, the trader will receive a margin call
equal to the difference between the initial margin requirement and the
trader's equity. If the trader is unable to obtain sufficient funds to
meet the margin call in a timely manner, then the futures (or short option)
position will be closed.
Mark-to-Market. 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 day.
Market-if-Touched Order. Instructions which a trader gives a broker
to buy or sell a futures or options contract when price reaches a specified
or better price. If the market price reaches the specified price, the
order automatically becomes a market order.
Market Order. Instructions which a trader gives a broker to buy
or sell a futures or options contract at the best price available and
as soon as possible, after the order reaches the trading floor.
Maturity. The period of time in a futures contract's life in which
the seller can make physical delivery, and the buyer can take physical
delivery of the cash grain.
Mid-America Commodity Exchange (Mid-AM). A government licensed
futures exchange in Chicago which trades futures contracts on agricultural
and financial products which have smaller quantity requirements than the
CME and CBT. The Mid-AM is owned by the CBT.
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.
Moving Averages. A trend-following technical tool which uses moving
averages to detect significant changes in the trend of the market.
N
Naked Writing. Selling (writing) an options contract with no opposite
cash or futures market position. Also called uncovered writing.
Nearby Futures Contract. The futures contract with maturity closest
to the current date.
Notice Day. The day on which a 'notice of intention of delivery'
can be issued for a specific futures contract.
O
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.
Open Order. See Good Till Cancelled Order.
Open Interest. The total number of futures or options contract
outstanding on a given commodity or contract at a specific point in time.
Option Contract. A contract giving the buyer the right to a position
in the futures market at a predetermined price. Also see Put Option and
Call Option.
Out-of-the-Money. A call option whose strike price is above the
current futures price, or a put option whose strike price is below the
current futures price. Out-of-the-money options have no intrinsic value.
Overbought. A market condition in which prices have risen too fats
or too far, relative to the underlying economic fundamental factors. Traders
would expect prices to fall in this type of market, at least in the near
term.
Oversold. A market condition in which prices have fallen too fast
and too far, relative to the underlying fundamental factors. Traders would
expect prices to increase in this type of market, at least in the near
term.
P
Pit. An area on the trading floor of a futures exchange where trading
is conducted. Each commodity has it's own pit.
Point. The minimum price fluctuation allowed for a particular type
of futures contract.
Point and Figure Chart. A charting technique which assumes that
the only important thing is the direction of price change—volume
and time are unimportant. Chart patterns are then observed to determine
a trading strategy.
Position Trader. A futures trader who has his futures position
for an extended period of time.
Premium. The price of an option, not including related brokerage
commission fees. The buyer of an option pays the premium, whereas the
seller of an option receives the premium.
Price Risk. The risk associated with not being able to predict
price accurately. Price risk is greater than basis risk.
Put Option. An option which gives the buyer the right, but not
the obligation, to sell the underlying futures contract at the strike
price on or before the expiration date.
R
Range. The difference between the highest and lowest price recorded
during some time period. The time period may be a day, week, month, life
of contract, or any given period.
Relative Strength Index. A technical tool which uses price changes,
rather than price levels, to indicate overbought or oversold market conditions.
Roundturn. A completed futures transaction initially begun by buying
or selling a futures or options contract, which was later offset by an
equal but opposite transaction. Brokerage commissions and fees for futures
market transactions are usually based on a roundturn.
S
Settlement Price. The price at which the clearing house of the futures
exchange clears all the day's trades.
Short. The position created by the sale of a futures or options
contract which does not offset another position.
Short Hedge. A hedge taken for protection against falling prices.
Speculator. A trader using the futures market for reasons other
than hedging. Speculators are necessary to provide liquidity for hedgers
to execute trades at low costs.
Strike Price. The price at which the buyer of an option contract
may choose to exercise the option.
T
Technicals. A term which refers to a variety of chart following techniques
and chart patterns related to market prices.
Technical Analysis. Analysis of the markets based on past price
data, rather than fundamental supply and demand information. It is based
on a wide array of tools to give buy and sell signals or to predict market
direction. Common technical tools include bar charts, contrary opinions,
Elliott Wave theory, moving averages, trend analysis, price strength indexes.
Time Value. The amount by which an option premium exceeds the option's
intrinsic value. If an option has no intrinsic value, its premium is entirely
time value.
U
Underlying Futures Contract. The specific futures contract that may
be bought or sold by the exercise of an option.
V
Volume. The total number of contracts traded in a given period of
time. Usually reported for each trading day.
W
Writer. The seller of an option contract. |
