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This glossary has been compiled by the Chicago Mercantile Exchange and GT Futures Group, Inc.from a number of sources. The definitions are not intended to state or suggest the correct legal significance or meaning of any word or phrase. The sole purpose of this compilation is to foster a better understanding of futures and options on futures.

Arbitrage

The simultaneous purchase and sale of identical or equivalent financial instruments or commodity futures in order to benefit from a discrepancy in their price relationship.

Ask

Also called "offer." Indicates a willingness to sell a futures contract at a given price.

At-the-money

An option is at-the-money when the underlying market price equals the strike price.

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Back and Fill B

A market that moves in a trend faster than seems justified for that time span, and often pauses and trades sideways to let time square with the price.

Basis

The difference between the cash price of an underlying commodity at a specific location and the price of a futures contract based on that underlying commodity.

Bear

One who believes prices will move lower.

Bear Market

A market in which prices are declining.

Bid

The price that the market participants are willing to pay.

Broker

(1) A person paid a fee or commission for acting as an agent in making contracts, sales or purchases; (2) when used as "floor broker", it means a person who actually executes someone else's trading orders on the trading floor of the exchange; )3) when used to mean account executive, it means the person who deals with customers and their orders in commission-house offices.

Bull

One who expects prices to rise.

Bull Market

A market in which prices are rising.

Buy On Close

To buy at the end of a trading session at a price within the closing range.

Buy On Opening

To buy at the beginning of a trading session at a price within the opening range.

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Cabinet Trade or cab

A trade that allows options traders to liquidate deep out-of-the-money options by trading the option at a price equal to one-half tick.

Call

An option to buy a commodity, security or futures contract at a specified price anytime between now and the expiration date of the option contract.

Cash Commodity

The actual physical commodity as distinguished from a futures commodity.

Cash Market

A market in which transactions for the purchase and sale of the physical commodity are made under whatever terms are agreeable to buyer and seller and are legal under law and the rules of the market organization, if such exist. "Cash market" can refer to an organized, self-regulated central market, such as the cash grain sections of the commodity exchanges that also have futures contract trading, or they can be markets like the central stockyards in the livestock industry. It can also refer to an over-the-counter type of market, in which buyers, sellers, and/or dealers compete in decentralized locations, possibly under rules of an organized association.

Clearinghouse

An agency connected with a commodity exchange through which all futures contracts are reconciled, settled, guaranteed, and later either offset or fulfilled through delivery of the commodity and through which financial settlement is made. It may be a fully chartered separate corporation, rather than a division of the exchange itself.

Close, The

The period at the end of the trading session. Sometimes used to refer to the closing range. (See opening, the.)

Closing Range (or Range)

The high and low prices, or bids and offers, recorded during the period designated as the official close. (See settlement price.)

Commission (or Round Turn)

The one-time fee charged by a broker to a customer when a futures or options on futures position is liquidated either by offset or delivery.

Commission-to-equity

The ratio between the total commission generated per year and the amount of capital invested.

Commodity Futures Trading Commission (CFTC )

A federal regulatory agency charged and empowered under the Commodity Futures Trading Commission Act of 1974 with regulation of futures trading in all commodities. The commission is comprised of five commissioners, one of whom is designated as chairman, all appointed by the President subject to Senate confirmation, and is independent of all cabinet departments.

Contract

Unit of trading for a financial or commodity future. Also, an actual bilateral agreement between the parties (buyer and seller) of a futures or options on futures transaction as defined by an exchange.

Contract Month

The month in which futures contracts may be satisfied by making or accepting delivery. (See delivery month.)

Correction (as in market correction)

A temporary change in the direction of a trend.

Covered writer

An option writer is "covered" when the writer holds an offsetting position in the underlying commodity market. For example, a short put option is covered by a short position in the underlying commodity. Conversely, a short call option is covered by a long position in the underlying commodity.

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Day Order

An order that is placed for execution during only one trading session. If the order cannot be executed that day, it is automatically cancelled.

Day Trading

Refers to establishing and liquidating the same position or positions within one day's trading, thus ending the day with no established position in the market.

Deck

Cards that list orders waiting to be filled by the floor trader.

Deferred

Another term for "back months." (See Back Months.)

Delivery

The tender and receipt of an actual commodity or financial instrument, or cash, in settlement of a futures contract.

Exercise Or Strike Price

The price at which the holder (buyer) may purchase or sell the underlying futures contract upon the exercise of an option.

Expiration Date

The last day that an option may be exercised into the underlying futures contract. Also, the last day of trading for a futures contract.

Extrinsic value

The price of an option over and above the intrinsic value. This "value" is commonly called the option's "time value".

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Fill or Kill Order

This type of order instructs the floor broker to execute your order immediately at the specified price. If the floor cannot fill the order immediately, the order is canceled.

First notice day

The first day on which notices of intent to deliver the commodity in fulfillment of a given month's futures contract can be made by the seller to the clearinghouse and by the clearinghouse to the buyer.

Flat

When an account has no open positions.

Floor Broker

An exchange member who is paid a fee for executing orders for Clearing Members or their customers. A Floor Broker executing orders must be licensed by the CFTC.

Floor Trader

An exchange member who generally trades only for his/her own account or for an account controlled by him/her. Also referred to as a "local."

Futures Contract

A term used to designate all contracts covering the purchase and sale of financial instruments or physical commodities for future delivery on a commodity futures exchange. Some option contracts are exercisable for futures contracts rather than the actual or physical commodity.

Futures Commission Merchant

A firm or person engaged in soliciting or accepting and handling orders for the purchase or sale of futures contracts, subject to the rules of a futures exchange and, who, in connection with solicitation or acceptance of orders, accepts any money or securities to margin any resulting trades or contracts. The FCM must be licensed by the CFTC.

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Hedge

The purchase or sale of a futures contract as a temporary substitute for a cash market transaction to be made at a later date. Usually it involves opposite positions in the cash market and futures market at the same time. (See long hedge, short hedge.)

Holder

One who purchases an option.

Initial margin requirement

The amount of money required to be on deposit with the brokerage house in order to carry a new position into the next trading day.

In-the-money

An option is in-the-money when the underlying contract price exceeds the strike price of the option. Conversely, a put option is in-the-money when the underlying contract price is less than the strike price.

Intrinsic value

A call option's intrinsic value is equal to the number of points the underlying contract exceeds the strike price of the option.. An option premium will never be less than the option's intrinsic value.

Legs

When the market trades in one direction, then reverses itself, and then reverses itself again, resuming the initial trend. Each reversal time period is known as a "leg" of the trend. In spread trading involving two contracts, one long and one short, each position (long or short) is known as a "leg" of the spread.

Leverage

Leverage refers to one's ability to participate in profits that result from favorable price movements of a particular commodity without putting up the full purchase price of the commodity.

Limit Move

A trade at the maximum or minimum price allowed by the exchange for that day.

Limit Order

An order given to a broker by a customer that specifies a price; the order can be executed only if the market reaches or betters that price.

Limit Price

(See maximum price fluctuation.)

Liquidation

Any transaction that offsets or closes out a long or short futures position.

Local

A pit trader who trades primarily for his/her own account.

Locked Limit

When the market has traded at its daily maximum price limit and no offers are made. Conversely, when the market has traded at its daily minimum price limit and no bids are made.

Long

One who has bought a futures or options on futures contract to establish a market position through an offsetting sale; the opposite of short.

Long Hedge

The purchase of a futures contract in anticipation of an actual purchase in the cash market. Used by processors or exporters as protection against and advance in the cash price. (See hedge, short hedge.)

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Margin

(See Performance Bond)

Margin call

A call from a clearinghouse to a clearing member, or from a brokerage firm to a customer, to bring margin deposits up to a required minimum level.

Mark-To-Market

The daily adjustment of margin accounts to reflect profits and losses.

Market On Close (MOC)

An MOC order directs the floor broker to buy or sell for you at the market in the closing range.

Market Order

An order for immediate execution given to a broker to buy or sell at the best obtainable price.

Maximum Price Fluctuation

The maximum amount the contract price can change, up or down, during one trading session, as stipulated by Exchange rules.

Maintenance Performance Bond (Previously referred to a Maintenance Margin)

A sum, usually smaller than--but part of--the initial performance bond, which must be maintained on deposit in the customer's account at all times. If a customer's equity in any futures position drops to, or under, the maintenance performance bond level, a "performance bond call" is issued for the amount of money required to restore the customer's equity in the account to the initial margin level.

Minimum Price Fluctuation

Also called a "tick."

M.I.T.

Market-If-Touched. A price order that automatically becomes a market order if the price is reached.

National Futures Association (NFA)

The NFA is a self-regulatory body proportionately made up of members from each sector of the industry. The NFA performs some of the CFTC's duties such as registration and licensing. Also anyone engaged in futures activities must be registered with the NFA and no member is allowed to do business with anyone not registered. The NFA also has audit and disciplinary authority.

Nearby

The nearest active trading month of a futures or options on futures contract. Also referred to as "lead month."

New crop

In the grain markets, used to refer to next fall's harvest.

Notice of intention to deliver

A notice that must be presented by the seller to the clearinghouse. The clearinghouse then assigns the notice and the subsequent delivery instrument to the longest-standing buyer on record. Under CBOT rules, such notices typically must be presented by 8:00 p.m. of the second business day prior to the day on which delivery is to be made.

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Offer

(See Ask)

Offset

Selling if one has bought, or buying if one has sold, a futures or options on futures contract.

Old crop

In the grain markets, used to refer to production from last fall's harvest.

Open equity

The value of all open positions at the end of the trading day, less the margin requirements of those positions.

Open Interest

Total number of futures or options on futures contracts that have not yet been offset or fulfilled by delivery. An indicator of the depth or liquidity of a market (the ability to buy or sell at or near a given price) and of the use of a market for risk- and/or asset-management.

Open Order

An order to a broker that is good until it is canceled or executed.

Open outcry

A method of public auction for making verbal bids and offers in the trading pits or rings of commodity exchanges.

Open position

A futures contract that is either long or short and does not have an offsetting position.

Opening, The

The period at the beginning of the trading session during which all transactions are considered made or first transactions were completed.

Opening Price (Or Range)

The range of prices at which the first bids and offers were made or first transactions were completed.

Option

A contract giving the holder the right, but not the obligation, hence, "option," to buy (call option) or sell (put option) a futures contract in a given commodity at a specified price at any time between now and the expiration of the option contract.

Out-of-the-money

A call whose strike price is above the current futures price, or a put whose strike price is below the current futures price.

Out-Trades

A situation that results when there is some confusion or error on a trade. A difference in pricing, with both traders thinking they were buying, for example, is a reason why an out-trade may occur.

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Position

(See open interest.)

Performance Bond (Previously referred to as Margin)

Funds that must be deposited as a performance bond by a customer with his or her broker, by a broker with a clearing member, or by a clearing member, with the Clearing House. The performance bond helps to ensure the financial integrity of brokers, clearing members and the Exchange as a whole.

Performance Bond Call 

(See Margin Call)

Premium

1.) The excess of one futures contract price over that of another, or over the cash market price. 2.) The amount agreed upon between the purchaser and seller for the purchase or sale of a futures option -- purchasers pay the premium and sellers (writers) receive the premium.

Put

An option to sell a commodity, security, or futures contract at a specified price at any time between now and the expiration of the option contract.

Rally

An upward movement of prices following a decline; the opposite of a reaction.

Range

The high and low prices or high and low bids and offers, recorded during a specified time.

Reaction

A decline in prices following an advance. The opposite of a rally.

Registered Representative

A person employed by, and soliciting business for, a commission house or Futures Commission Merchant.

Retender

The right of holders of futures contracts who have been tendered a delivery notice through the clearinghouse to offer the notice for sale on the open market, liquidating their obligation to take delivery under the contract; applicable only to certain commodities and only within a specific period of time.

Retracement

The amount, usually stated as a percent, that prices correct in a given trend.

Reward-to-risk ratio

A measure of the potential profit of an investment versus the perceived risk.

Roll their positions

The simultaneous liquidation of one's position in one month and the re-establishment of that position in another contract month.

Round-Turn

Procedure by which a long or short position is offset by an opposite transaction or by accepting or making delivery of the actual financial instrument or physical commodity.

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Scalp

To trade for small gains. Scalping normally involves establishing and liquidating a position quickly, usually within the same day, hour or even just a few minutes.

Seller

Also known as the option writer or grantor. The seller of an option is subject to a potential obligation if the buyer chooses to exercise the option.

Settlement Price

A figure determined by the closing range that is used to calculate gains and losses in futures market accounts. Settlement prices are used to determine gains, losses, margin calls, and invoice prices for deliveries. (See closing range.)

Short

One who has sold a futures contract to establish a market position and who has not yet closed out this position through an offsetting purchase; the opposite of long.

Short Hedge

The sale of a futures contract in anticipation of a later cash market sale. Used to eliminate or lessen the possible decline in value of ownership of an approximately equal amount of the cash financial instrument or physical commodity. (See hedge, long hedge.)

Slippage

The difference between the target price you might expect and the actual, executed price.

Speculator

One who attempts to anticipate price changes and, through buying and selling futures contracts, aims to make profits; does not use the futures market in connection with the production, processing, marketing or handling of a product. The speculator has no interest in making or taking delivery.

Spread

The simultaneous purchase and sale of futures contracts for the same commodity or instrument for delivery in different months, or in different but related markets. A spreader is not concerned with the direction in which the market moves, but only with the difference between the prices of each contract.

Stop Order (Or Stop)

An order to buy or sell at the market when and if a specified price is reached.

Strangle

A trading strategy whereby you write (sell) a put and a call.

Strike price

The price of the underlying contract at which the buyer of an option has the right, but not the obligation, to purchase the underlying contract at any time before the expiration of the option. Normally, options are available at a number of different strike prices for the same underlying commodity with the same expiration date.

Tender

The act on the part of the seller of futures contracts of giving notice to the clearinghouse that he intends to deliver the physical commodity in satisfaction of the futures contract. The clearinghouse, in turn, passes along the notice to the oldest buyer of record in that delivery month of the commodity. (See also retender)

Tick

(See minimum price fluctuation.)

Time-and-sales record

A record that details every trade made in a particular commodity and the exact time of each trade. This record is used to resolve disputes over the accuracy of fills.

Time value

Any amount by which an option premium exceeds the option's intrinsic value. If an option has no intrinsic value, its premium is made up entirely of time value. (See also extrinsic value)

Trailing stop

An exit strategy that continues to move your stop as the market trades in your favor.

Trend

The general direction of the market.

Volume V

The number of transactions in a futures or options on futures contract made during a specified period of time.

Writer W

An individual who sells an option. (See seller)

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