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GLOSSARY OF TRADING TERMS:
A - D
E - I
L -P
R - V
Actual - The physical commodity.
Afloat - Physical commodities on vessels.
Arbitrage - The simultaneous purchase of one commodity, future or
option, against the sale of another in order to profit from distortions
from usual price relation ships. Variations include simultaneous
purchase and sale of different delivery months of same commodity,
future or option; of the same commodity, future or option and delivery
month on two different exchanges; and the purchase of one commodity,
future or option against the sale of another commodity, future or
option. See also "Spread."
Basis - The difference between a cash price at a specific location and
the price of a particular futures contract.
Bid - An offer to buy a specific quantity of a commodity, future or
option at a stated price.
Buy Hedge - (Long Hedge) – Buying futures contracts/call
options
or selling put options to protect against possible increased cost of
physical commodities that will be bought in the future.
Call Option - An option that gives the buyer the right to be long the
underlying futures contract at a specific price (strike price) on or
before the expiration date. Call option buyers are not obligated to be
long; they have the right to be long. See also "Put Option" and "Strike
Price."
Carry - Cost of warehousing the physical commodity, generally including
interest, insurance, and storage. See also "Full Carry."
Carryover - Grain and oilseed commodities not consumed during the
marketing year and remain in storage (called ending stocks). Ending
stocks are then added or carried over to the next marketing year.
Cash Commodity - The physical commodity, also known as actual.
Certified Stock - Stocks of a physical commodity that have been
inspected and found to be of a quality that is deliverable against
futures contracts, stored at the delivery points which are designated
as regular or acceptable points for delivery by the commodity exchange.
Charting - See "Technical Analysis."
C. I. F. - Cost of insurance &freight paid to port of
destination.
Clearinghouse - An agency connected with a commodity exchange or a
separate corporation with the responsibility of reconciling all trading
accounts and clearing trades, managing the delivery process and keeping
accurate records of customer’s accounts. They are also
responsible for collecting and maintaining margin monies. See also
"Futures Commission Merchant."
Closing Range - The range of prices at which transactions took place at
the closing of the market.
Commercials - Cash grain firms, exporters, or processors.
Commodity Credit Corporation (CCC) -A wholly government-owned
corporation established in 1933 to assist U.S. agriculture. The major
operations of the CCC are price-support programs in which it purchases
excess supplies of commodities, and provides assistance in foreign
exports of agricultural commodities.
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 Grades - Standards or grades of commodities listed in the
rules of the exchanges that must be met when delivering cash
commodities against futures contracts. Grades are often accompanied by
a schedule of discounts and premiums allowable for delivery of
commodities of lesser or greater quality than the contract grade.
Cross Hedge - Hedging a physical commodity using related futures or
options contracts to manage risk. An example would be to use corn
futures to hedge grains.
Crush - A process that can convert one physical commodity into
by-products that are also represented by futures contracts such
soybeans to soybean meal and soybean oil. It can also mean the purchase
soybean futures and the sale of soybean meal and soybean oil futures.
Similar to the "Crack" which is involves crude oil, gasoline, and
heating oil.
Day Order - A buy or sell order that is valid for a particular trading
session or typically during trading for one day. Automatically expires
on the day it was placed, at the end of trading, if not filled.
Day Trades - futures and options trades that are established and then
liquidated by the close of trading, on the same day.
Deferred Futures - The particular futures contracts currently trading
that expire during the most distant months as contrasted to the spot or
delivery month.
Delivery - The transfer of the physical commodity from the seller of
the futures contract to the buyer of the futures contract as specified
in the futures contract. Hence each contract or exchange has its own
rules for delivery process. It can also mean the cash settlement of
those contracts, which are not actually delivered upon. See also
"Tender."
Delivery Grade - See "Contract Grade."
Delivery Month - A particular month in which the futures contract
specifies delivery may occur. It is sometimes called the contract month
or spot month.
Delivery Notice - Notice from the clearing house of a seller's
intention to deliver the physical commodity against his short futures
positions; precedes and is distinct from the warehouse receipt or
shipping certificate, which is the instrument of transfer of ownership.
Also see "Notice of Intention to Deliver" & "Tender."
Delivery Points - Those locations and facilities designated by a
commodity exchange at which stocks of a commodity may be delivered in
fulfillment of a contract, under procedures established by the exchange.
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EFP - Exchange for Physicals – This is an exchange of the
physical commodity for a monetary settlement.
Expiration Date - The day or date that a futures' option expires.
Specifically it is the last day that the particular option can be
exercised. See also "Last Trading Day."
Fast Market - A characteristic of a market in which open outcry trades
executed surpass the pit recorders' ability to record all trades for a
given delivery month or months. Generally occurs when volume is very
large for a particular month(s).
Fill or Kill Order - A limit order for futures or options that is to be
filled immediately entering the pit and canceled if the broker is
unable to fill it at once.
First Notice Day - The first day on which "Notices of Intent to
Deliver" the physical commodity can be made by the seller to the
clearinghouse and by the clearinghouse to a buyer.
F.O.B. - Free on board; without charge to the buyer for goods placed on
board a carrier at the point of shipment.
Forward Contract - A cash transaction where the seller agrees to
deliver a specific quantity and quality of goods to a specific place
sometime in the future with prices established according to the
contract. This could be the day of the contract or even the day of
delivery. Since these contracts are not standardized, specifications
are specific to each particular contract.
Forward Price - Refers to sales into the future of a physical commodity
by the use of forward contracting or futures and options hedging. It is
a marketing tool for grain buyers and sellers.
Free Supply (or Free Stocks) -Stocks of a physical commodity which are
available for commercial sale, as distinguished from government-owned
or controlled stocks.
Full Carry - A situation in the futures market when the price
difference between delivery months reflects the cost of interest,
insurance and storage.
Fundamentals - Conditions that could affect the price movement of
futures and options. This includes but is not limited to weather,
supply & demand, government policy, and foreign policy.
Fundamental Analysis - Using the fundamentals to analyze and predict
future trends of futures and option prices. Distinguished from
Technical Analysis.
Futures Clearing Merchant - (FCM) - An individual or corporation that
accepts or solicits orders for futures and options trading and accepts
monies from customers to maintain accounts. Also responsible for
reconciling all trades with the exchange clearing house.
Futures Contract - An agreement made at prices established in the
trading pit or electronic trading to buy or sell a physical commodity
sometime in the future. Futures contracts are standardized agreements,
which specify quantity and quality of the physical commodity. They also
specify the time of delivery and exchange designated point of delivery.
Hedging - The use of futures and options to reduce risk of price
movement by establishing the opposite position of what an individual or
corporation plans to do with a particular physical commodity in the
future. An example would be a corn farmer that planted corn in May,
sells a contract of Dec Corn futures on June 10, to offset risks of
prices moving lower into the fall because he would be selling harvested
corn in the future.
High - The highest price established for a futures or options contract
at any given time. An example would be a high for the day (daily high),
or weekly high, monthly high or contract high.
Initial Margin - The amount of monies or assets a futures/options
trader must have in the trading account at the time the order is placed
as required by the Futures Clearing Merchant or Exchange. See also
"Maintenance Margin."
Inverted market - An abnormal situation in futures or cash where the
front month or months are higher than distant months in the same crop
year. Typically is caused by a shortage of the physical commodity.
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Last Trading Day - The day on which trading ceases for the current
delivery month of either futures or options.
Last Notice Day - The final day on which notices of intent to deliver
on futures contracts may be issued.
Life of Contract - The period from the first trading day to the last
day of trade (inclusive) for a particular trading month in futures and
options.
Limit Move - The maximum move in prices for a particular contract as
permissible during one trading session, in accordance with exchange
rules.
Limit Order - An order in which the customer sets a limit on either
price and/or time of execution.
Liquid market - A market where selling and buying can be accomplished
with ease, due to the presence of large open interest or a large number
of interested buyers and sellers willing and able to trade substantial
quantities without a substantial change in price.
Liquidate -The sale of an equal number of long futures/options
contracts (the same delivery month) or buying an equal number of short
futures/options contracts (the same delivery month) or entering the
delivery process by making or taking delivery. See also "Offset."
Liquidation - A characteristic of a market where holders of long
positions, sell (the same delivery month), and holders of short
positions, buy (the same delivery month), and open interest declines.
Long - To buy or have bought a futures contract and/or call options on
futures with out offsetting a short position. Can also mean to own the
physical commodity such as a producer with corn in a storage bin for
sale at a later date.
Maintenance Margin - The amount of money required to maintain positions
in an account.
Margin - Money or assets (such as T-bills) deposited into an account
for the purpose of trading futures contracts. Margin can vary among
different commodity futures contracts, it can be required when selling
options, and must be maintained in accordance to exchange and FCM
policy.
Margin Call - A call or notification to a customer that their margin
account (trading account)requires additional margin to maintain
positions in accordance with policy or exchange rules.
M.I.T. - (Market If Touched) – 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.
M.O.C. (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.
Market on Open - An order with the intention to buy or sell at a price
within the opening range of prices when the trading session begins.
Market Order - An order to buy or sell futures/options contracts of a
specified delivery month which is to be filled at the best possible
price as soon as possible.
Maturity - The time between the first notice day and the last trading
day of a commodity futures contract.
National Futures Association - (NFA)- A futures industry supported,
self-regulatory organization. Responsibilities include enforcing
ethical standards, customer protection rules, evaluate futures
professionals, audit those professionals for financial and compliance
standards and provide conflict resolution for futures/options related
disputes.
Nearby - The nearest delivery contract month of a commodity futures
market. Upon first notice of delivery, referred to as the "spot month
or delivery month."
Notice of Intention to Deliver – a notice that must be
presented
by the seller to the clearing house for the purpose of making delivery.
The clearinghouse (exchange)assigns the notice to the oldest
outstanding position held by a buyer in accordance with the contract
specifications.
Offset - The sale of an equal number of long futures/options contracts
(the same delivery month) or buying an equal number of short
futures/options contracts (the same delivery month). An example: a
trader is long 1 July '97Soymeal contract and wants to be out of the
market, he would offset by selling 1 July '97 Soymeal contract. Once
executed, that trader has no position.
Open Interest - The total number of futures contracts of a given
commodity that have not yet been offset by opposite futures
transactions nor fulfilled by delivery of the commodity; the total
number of open transactions. Each open transaction has a buyer and a
seller, but for calculation of open interest, only one side of the
contract is counted.
Opening Range - The range of prices that occurred at the start of
trading.
Open Order - An order that remains in effect until canceled by the
customer or until the futures/options contract expires.
Option - The right, but not the obligation, to buy or sell an
underlying futures contract at a specific price during a specified time
period. (Can also mean the price of cash grain or oilseed that is equal
to the underlying futures price. Example: The cash price for soybeans
in the first half of July is 8.00 and at the same time, July futures
are8.00.) See also "Call Option," "Put Option" and "Strike."
P & S statement - (purchase& sale) - A statement sent
by a
futures clearing merchant to a customer regarding their trading account
when a transaction has occurred. Shows new positions, offset positions,
profit and loss, commissions, etc.
Position - Commitment or interest in the futures market. Example: a
trader who has purchased a July Soymeal contract holds a long position.
A short position is to have sold futures/call options or bought puts.
Long positions are buying futures/call options and selling puts. A
position is determined by weighing the number of long positions against
the number of short positions (including options).
Position limit - The maximum number of futures contracts one can hold
as determined by the commodity futures trading commission and/or the
exchange upon which the contract is traded.
Premium - Generally, the excess of cash commodity value over a futures
contract or over another cash commodity value or of one futures
contract price over another. Can also mean option premium, which is the
value of the option at the time of its sale. The buyer pays the premium
(which is limited risk) and the seller receives the premium (which has
unlimited risk. Option premium is the price determined by open outcry
in the pit between buyers and sellers. Characteristics such as the
strike price and expirations are already set in accordance to each
particular contract.
Price Objective - The price where a person analyzing prices, expects a
particular market to achieve.
Protection - Occurs when exchange trading is closed and used with the
purpose of reducing a grain buyer's hedging risk. It reduces the price
a seller would get for the grain. Typically refers a "cushion" that
commercial grain buyers give themselves in addition to normal basis
when they are concerned about prices dropping at the time the exchange
resumes trading (when the market opens). An example: on July 1,the
upper Midwest had received no rain for 2.5 weeks and prices were higher
in that period. Unexpectedly, a rain occurs after trading hours, giving
crops relief. Grain buyers might then take"30 cents protection in the
beans," with the anticipation the rains will drive prices much lower on
the open. The net effect is that a person selling beans before the
market opens would get 30 cents less.
Price Trend - Generally refers to the direction of price movement, can
be used regarding how prices are moving for the day compared to the
previous trading session.
Put Option - An option that gives the buyer the right to be short the
underlying futures contract at a specific price (strike price) on or
before the expiration date. Put Option buyers are not obligated to be
short, they have the right to be short. See also "Call Option," and
"Strike Price."
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Rally - Upward price movement.
Range - The difference between the highest and lowest prices recorded
during a specified trading period, such as the range for the day or
week.
Re-Tender - Traders offering for sale on the open market, the commodity
for which the trader was issued a Notice of Intent to Deliver. If
completed, a trader can liquidate their obligation to take delivery of
the commodity. Can also mean offering to buy a commodity after passing
on an tender, such as South Korea re-tendering for 54,000 tons US Corn
after passing at higher prices.
Roll Over - Moving from one delivery month in a futures contract to a
delivery month farther away, such as a holder of long July corn
offsetting that position and buying a Sep contract. Usually done on the
same order and executed at the same time.
Round Turn - Generally refers to the offsetting of a position.
Sell Hedge - (Short Hedge) – selling futures contracts/call
options or buying put options to protect against the possible decrease
of physical commodity prices which will be sold in the future. See also
"Hedge."
Settlement price - Established by an Exchange as the official price for
any particular future or option at the close of each trading session.
Also referred to as the closing price. See also "Closing Range."
Short - To sell or have sold a futures contract and/or call options on
futures, without offsetting a long position. Can also mean to be in
need of the physical commodity such as a hog producer that buys soybean
meal to feed hogs.
Short Covering - The buying of futures/options in order to offset a
short position. Generally referred to when traders are taking a profit
or trying to control losses.
Sideways - Typically a period in which market prices trade within a
range, and not trending upward or downward.
Speculator - An individual who trades futures/options contracts in an
attempt to profit from price movement. The individual has no intention
of owning or selling the physical commodity. Speculators assume risk
from Hedgers and add liquidity to markets.
Spot Commodity - The physical commodity.
Spot Month - See "Near by Month."
Spot Price - The price at which a physical commodity is selling at a
given time and place.
Spread - Generally, the price difference of physical commodity values
or over another physical commodity value or of one futures/options
contract price over another futures/options contract. See also
"Premium."
Spreading - Buying and selling futures contracts on the same order to
be executed at the same time. An example is placing an order to buy Dec
Corn futures @3.00 and to sell Sep Corn futures @ 3.00 (0 cents
premium) with the anticipation that Dec futures will gain value faster
than Sep Corn futures (as in prices building "Full Carry").
Squeeze - A characteristic of a market where traders are forced to
liquidate at unfavorable prices. An example would be a market where
there are more long positions willing to take delivery than commodity
available for delivery. Holders of short positions wanting to get out
of the market are forced to offset at higher prices.
Stop - (Stop Order) - A buy stop is an order that is placed above
current prices and is activated (becomes a market order to buy) when
prices reach that level or above or are bid at that level or above. A
sell stop is an order that is placed below the market and activated
(becomes a market order to sell) when prices reach that level or below
or are offered at that level or below. Generally used to establish a
new position at a certain level or to manage risk once a position is
established (prevent losses).
Stop Limit Order - Similar to the Stop Order with the exception that
the order must be filled at he stop level or at better prices.
Strike - (Strike Price) - An option = price at which the underlying
futures contract can be bought(call option) or sold (put option). An
example would be a Nov8.00 Soybean Call, could be exercised to
establish a long Nov Soybean position at the $8.00 price level. See
also "Call Option," "Put Option" and "Underlying Futures Contract."
Technical Analysis - The study of charts which includes price movement,
volume, open interest, etc. Typically performed with graphical analysis
as to anticipate future direction of prices or trends, etc.
Tender - An act on the part of the holder of short futures contracts to
deliver the physical commodity in accordance to the contract
specifications. Typically, the exchange or clearinghouse will issue to
the oldest buyer of long futures positions, the seller's "Notice of
Intention to Deliver." Can also mean offering to buy a physical
commodity, such as South Korea tendering for 54,000tonnes US Corn.
Tick - The least amount of price movement in a futures/options contract.
Time & Sales - An official record of trading (buying &
selling) including prices and time.
Trading Limit - Can also mean the largest quantity of a
futures/options, which may be bought or sold by one person during one
trading day and/or the largest futures/options position any individual
is allowed to hold at anytime under CFTC regulations. See also "Limit
Move."
Trading Range - A range of prices for any given period such as the
day's trading range from high to low.
Trend - In prices, means the general direction, either upward or
downward price movement. See also "Price Trend." Can also mean a
pattern in which the same characteristic is occurring over a period of
time, such as a government's trend to reduce inflation by raising
interest rates over one year.
Underlying Futures Contract – The specific futures contract
established (such as Dec Corn) when an option buyer exercises their
option right to buy or sell. See also "Call Option," "Put Option" and
"Strike Price."
Vertical Call Spread - Spreading two different strike prices of options
of the same commodity and expiration date.
Volatility - the standard deviation of the continuously compounded
returns of a financial instrument with a specific time horizon. It is
often used to quantify the risk of the instrument over that time period.
Volume - The number of trades (buys or sells) in a given period such as
one day.
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