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Business Trade Glossary

September 03, 2010

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Trade & Business Glossary:

Futures Markets | Grain Markets

FUTURES Markets GLOSSARY:

For a more comprehensive list of terms related to markets please go through Grain Markets

Arbitrage: The simultaneous purchase and sale of two different, but related, securities with the intent of profiting by the price discrepancy.

Actuals: Physical products bought and sold in the spot market.

ADP: Acronym for "Alternative Delivery Procedure", a contract delivery method permitting the buyer and seller, by agreement, to settle their delivery commitment independently of the exchange.

Allowances: The discounts (premiums) allowed the buyer for the grades or locations of a commodity lower (higher) than the par or basis grade or location specified in the futures. Also called differentials.

American Style Options: An option contract that can be exercised at any time between the date of purchase and the expiration date.

Backwardation: A condition when the front month is higher in price than the back months. Also known as an inverted market.

Basis: The difference between spot (cash) prices and the futures contract price.

Basis Grade: The commodity grade used as the contract standard.

Beta: A measure of volatility that tells how much a stock moves in relation to an index or average. A beta of 1.5, for example, means that the stock may move 50%, either up or down, more than the Dow Jones industrials, or other indicator on which it is based.

Bias: The difference between the expected value of an estimator and the actual value to be estimated.

Black-Scholes Option Pricing Model: A model developed to estimate the market value of option contracts.

Breakaway Gap: When a tradable exits a trading range by trading at price levels that leaves a price area where no trading occurs on a bar chart. Typically, these gaps appear at the completion of important chart formations.

CFTC: Commodity Futures Trading Commission, established in 1975 to take over regulation of all U.S. futures and options trading.

C&F: "Cost and freight". Paid to move a commodity to a port of destination and included in the price quoted.

Car: A loose, quantative term sometimes used to describe a contract, e.g. "car of bellies". Derived from when quantities of the product specified on a contract often corresponded closely to the quantity carried in a railroad car.

Cash Commodity: The actual physical commodity, as distinguished from a futures commodity.

Cash Market: Market for immediate delivery and payment of commodities.

Certified Stocks: Quantities of commodities designed and certified for delivery by an exchange under its trading and testing regulations at delivery points specified and approved by the exchange.

Coincidence: In Gann theory, a projected reversal point.

Convergence: When futures prices and spot prices come together at the futures expiration.

Commercial Stocks: Commodity in storage in public and private elevators or warehouses at important markets and afloat in vessels or barges in harbors and ports.

Commodity Pool: An enterprise in which funds contributed by a number of persons are combined for purposes of trading futures or options for profit.

Contango: A condition when the front month prices are lower than the back month prices. This is normal for most markets because back months include carrying costs (interest, storage, etc.).

Crop Year: The period of time from one harvest or storage cycle to the next; varies with each commodity.

Deferred Futures: Futures contracts that expire during the more distant months.

Delta: A measure of the rate of change in an option's theoretical value for a one-unit change in the price of the underlying security.

Derivatives: Financial contracts the value of which depends on the value of the underlying instrument - commodity, bond, equity, currency or a combination.

Diagonal Spread: A strategy involving the simultaneous purchase and sale of two options of the same type that have different strike prices and different expiration dates.

Divergences: When two or more averages or indices fail to show confirming trends.

Exchange for Physicals (EFPs): A technique in which a physical commodity is traded for a futures position.

Fast Markets: A declaration that market conditions, in the futures pit, are so disorderly temporarily to the extent that floor brokers are not held responsible for the execution of orders.

First Notice Day: The first date, varying by commodities and exchanges, on which notices of intentions to deliver actual commodities against futures are authorized.

Forward Market: Informal (non-exchange) trading of contracts of future delivery. Contracts for forward delivery are "personalized", i.e. delivery time and amount are determined by the customer.

Gamma: The degree by which the delta changes with respect to changes in the underlying instrument's price.

Front Month: The first expiration month in a series of months.

Give Up: An order that, at the request of the customer, is credited to a brokerage house that has not performed the execution service.

Grading Certificate: A paper setting forth the quality of a commodity as determined by authorized inspectors or graders.

Hedge: A position established with the specific intent of protecting an existing position.

Lag: The number of data points that a filer, such as a moving average, follows or trails the input price data.

Leg Out: In rolling forward in futures, a method that would result in liquidating a position.

Nearby's: The nearest delivery months of a futures market.

Nominal Price: Price quotation on futures for a period in which no actual trading took place.

Notice Day: A day on which notices of intent to deliver pertaining to a specified delivery month may be issued.

Offer: Indicates a willingness to sell a futures contract at a given price. It is the opposite of Bid.

Open Contracts: Contracts that have been bought or sold and are still outstanding, not having been delivered upon or offset.

Overbought: Market prices that have risen too steeply or too fast.

Oversold: Market prices that have decline too steeply and too fast.

P&S: "Purchase and Sale" statement. A statement provided by the broker to the customer showing the change in his net ledger balance after the offset of a previously established position.

Position Limit: The maximum number of open option contracts that an investor can hold in one account or a group of related accounts. Some exchanges express the limit in terms of option contracts on the same side of the market and others express it in terms of total long or short or short delta.

Premium: 1) Total price of an option: intrinsic value plus time value. 2) Often this word is used to mean the same as time value.

Pyramiding: Using profits on a previously established position as margin for adding to that position.

Resistance: A price level at which rising prices have stopped rising and either moved sideways or reversed direction.

Roll: Substituting a far option for a near option on the same underlying instrument at the same strike price; also to roll forward or roll over.

Round Turn: The purchase and sale of a contract. The long or short position of an individual is offset by an opposite transaction or by accepting or making delivery of the actual commodity.

Scalp: In commodities, purchasing and selling equal amounts so there is no net position at the end of the trading day; a speculative attempt to make a quick profit by buying at the initial offering price in the hope the issue will increase and can be sold.

Short: To be a seller or a person who has sold a futures contract to establish a market position and who has not yet closed out his position through an offsetting purchase or deliver. The opposite of being long.

Short Squeeze: A situation in which a lack of supplies tends to force those who have sold to cover their positions by offsetting them in the futures market rather than by delivery.

Short the Basis: The forward sale of a cash commodity hedged by the purchase of a futures against the cash position.

Spot: Market of immediate delivery of a product and immediate payment. Also refers to the nearest delivery month of a futures contract.

Support: A historical price level at which falling prices have stopped falling and either moved sideways or reversed direction.

Swap: An interest rate swap is an agreement between two parties to exchange interest rate payments on a fixed (notional) amount of debt. In its standard (generic) form, one party to the swap agrees to pay a fixed interest rate in exchange for receiving a variable (floating) rate on the swap's notional amount. The reverse position is taken by the counterparty. Typically, the floating rate side of the swap is tied to the three or six month LIBOR (London Interbank Offer Rate).

Switching: Liquidating an existing position and simultaneously reinstating that position in another contract month of the same commodity or currency.

Theta: The measurement of the time decay of a position.

Time Value: The difference between the premium paid for an option and the intrinsic value. As an option approaches expiration, the time value erodes, eventually to zero.

"To-Arrive" Contract: A transaction providing for subsequent delivery within a stipulated time limit of a specific grade of a commodity. The "to-arrive" sales contract was the forerunner of the present-day futures contract.

Uncovered Option: The buy and sale of an option without a position in the underlying futures contract, also known as a naked option.

Vega: The amount by which the price of an option changes when the volatility changes.

Zeta: The percentage change in an options price per 1% change in implied volatility.

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