Glossary

Calendar Spread

The simultaneous sale and purchase of either calls or puts with the same strike price but different expiration months. This spread can also be implemented with outright futures.

Call Option

An option that gives the buyer the right, but not the obligation, to purchase (go "long") the underlying futures contract at the strike price on or before the expiration date.

Canceling Order

An order that will delete or cancel a previous order placed by the client.

Carry Charge

For physical commodities like grains or metals, it is the cost of storage, insurance, and financing which is incurred for holding the physical commodity. In interest rate futures markets, it refers to the differential between the yield on a cash instrument and the cost of funds necessary to buy the instrument. Also referred to as cost of carry or carry.

Carryover

Grain and oilseed commodities not consumed during the market year that remain in storage at year's end. These stocks are "carried over" into the next market year and are added to the stocks produced during that next crop year.

Cash Commodity

An actual physical commodity someone is buying or selling, I.e., soybeans, corn, gold, oil, Treasury notes, etc. See actual.

Cash Contract

A sales agreement for either immediate or future delivery of the actual product.

Cash Market

A place where producers/ wholesalers/ end-users buy and sell the actual commodities, i.e., grain elevator, bank, etc.

Cash Settlement

Transactions generally involving index-based futures contracts which are settled in cash on the last trading day for that index, based on the last traded price for that index. This is in contrast to those markets that specify the delivery of a commodity or financial instrument.

Charting

The use of charts to analyze market behavior and anticipate future price movements. Those who use charting as a trading method plot such factors as high, low, and settlement prices; average price movements; volume; and open interest. Two basic price charts are bar charts and candlestick charts. See Technical Analysis.

Cheapest to Deliver

A method to determine which particular cash debt instrument is most profitable to deliver against a futures contract.

Clearing a trade

The process by which a clearing clears all executed trades. In order to settle prices at the end of each trading day, the clearing house must match all buys to all sells. Once an executed buy is matched to an executed sell and the respective accounts are debited or credited the transaction, the trade is said to be 'cleared'.

Clearinghouse

An agency or separate corporation of a futures exchange that is responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery, and reporting trading data. Clearinghouses act as third parties to all futures and options contracts acting as a buyer to every clearing member seller and a seller to every clearing member buyer.

Clearing Member

A member of an exchange clearinghouse. Memberships in clearing organizations are usually held by companies. Clearing members are responsible for the financial commitments of customers that clear through their firm.

Closing Price

See Settlement Price.

Closing Range

A range of prices at which buy and sell transactions took place during the final one to two minutes of trading.

Closing Transaction

A transaction in which at some point prior to expiration, the option holder makes an offsetting sale of an identical option, or the option writer makes an offsetting purchase of an identical option. A closing transaction in an option reduces or cancels out an investor's previous position as the holder or the writer of that option.

Commission Fee

A fee charged by a broker for executing a transaction. Also referred to as brokerage fee.

Commission House

See Futures Commission Merchant (FCM).

Commodity

An article of commerce or a product that can be used for commerce. In a narrow sense, products traded on an authorized commodity exchange. The types of commodities include agricultural products, metals, petroleum, foreign currencies, and financial instruments and indexes.

Commodity Credit Corporation (CCC)

A branch of the U.S. Department of Agriculture, established in 1933, that supervises the government's farm loan and subsidy programs.

Commodity Futures Trading Commission (CFTC)

A federal regulatory agency established under the Commodity Futures Trading Commission Act, as amended in 1974, that oversees futures trading in the United States. 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.

Commodity Pool

An enterprise in which funds contributed by a number of persons are combined for the purpose of trading futures contracts or commodity options.

Commodity Pool Operator (CPO)

An individual or organization that operates or solicits funds for a commodity pool.

Commodity Trading Adviser (CTA)

A person who, for compensation or profit, directly or indirectly advises others as to the value or the advisability of buying or selling futures contracts or commodity options. Advising indirectly includes exercising trading authority over a customer's account as well as providing recommendations through written publications or other media.

Contract Grades

See Deliverable Grades.

Contract Month

See Delivery Month.

Convergence

A term referring to cash and futures prices tending to come together (i.e., the basis approaches zero) as the futures contract nears expiration.

Cost of Carry (or Carry)

See Carrying Charge.

Coupon

In finance, coupons are "attached" to bonds, either physically (as with old-school bonds) or electronically as with present day bonds. Each coupon represents a predetermined payment promised to the bond-holder in return for his or her loan of money to the bond-issuer. The bond-holder is typically not the original lender, but receives this payment for effectively lending the money. The coupon rate (the amount promised per dollar of the face value of the bond) helps determine the interest rate or yield on the bond.

Covered Call Option Writing

A strategy in which one sells call options while simultaneously owning an equivalent position in the underlying security

Covered Put Option Writing

A strategy in which one sells puts and simultaneously is short an equivalent position in the underlying security.

Crop (Marketing) Year

The time span from harvest to harvest for agricultural commodities. The crop marketing year varies slightly with each ag commodity, but it tends to begin at harvest and end before the next year's harvest, e.g., the marketing year for soybeans begins September 1 and ends August 31. The futures contract month of November represents the first major new-crop marketing month, and the contract month of July represents the last major old-crop marketing month for soybeans.

Crop Reports

Reports compiled by the U.S. Department of Agriculture on various ag commodities that are released throughout the year. Information in the reports includes estimates on planted acreage, yield, and expected production, as well as comparison of production from previous years.

Cross-Hedging

Hedging a cash commodity using a different but related futures contract when there is no futures contract for the cash commodity being hedged and the cash and futures markets follow similar price trends (e.g., using soybean meal futures to hedge fish meal).

Crush Spread

By simultaneously purchasing soybean futures and selling soybean meal futures, a trader is attempting to establish an artificial position in the processing of soybeans, created through the spread. See Reverse Crush.

Currency Option

The right to buy or sell one currency against another currency at a specified price during a specified period.

Daily Trading Limit

The maximum price range set by the exchange each day for a contract. Day Traders: Speculators who take positions in futures or options contracts and liquidate them prior to the close of the same trading day.

Day Order

An order which remains in effect only until executed or until the end of the trading session.

Debt instruments

1) Generally, legal IOUs created when one person borrows money from (becomes indebted to) another person; 2) Any commercial paper, bank CDs, bills, bonds, etc.; 3) A document evidencing a loan or debt. Debt instruments such as T-Bills and T-Bonds are traded on the CME and CBOT, respectively.

Deferred (Delivery) Month

The more distant month(s) in which futures trading is taking place, as distinguished from the nearby (delivery) month.

Deliverable Grades

The standard grades of commodities or instruments 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 standard called for by the exchange. Also referred to as contract grades.

Delivery

The transfer of the cash commodity from the seller of a futures contract to the buyer of a futures contract. Each futures exchange has specific procedures for delivery of a cash commodity. Some futures contracts, such as stock index contracts, are cash settled.

Delivery Day

The third day in the delivery process when the buyer's clearing firm presents the delivery notice with a certified check for the amount due at the office of the seller's clearing firm.

Delivery Month

A specific month in which delivery may take place under the terms of a futures contract. Also referred to as contract month.

Delivery Points

The locations and facilities designated by a futures exchange where stocks of a commodity may be delivered in fulfillment of a futures contract, under procedures established by the exchange.

Delta

The ratio that compares the change in price of the underlying asset with the change in price of its derivative (future contract). If a call option has a delta of .83, then for every $1 that the underlying asset increases, the call option will increase by $.83. For a put option it will be negative or the value of the option will decrease. A put with a delta of -.83 will decrease by $.83 for every $1 that the underlying increases in price. When a in-the-money call nears expiration its delta will approach 1.00 & an in-the-money put at expiration will approach a delta of -1.00

Law of Demand

Demand exhibits a direct relationship to price. If all other factors remain constant, an increase in demand leads to an increased price, while a decrease in demand leads to a decreased price.

Differentials

Price differences between classes, grades, and delivery locations of various stocks of the same commodity.