Glossary

Offer

An expression indicating one's desire to sell a commodity at a given price; opposite of bid. Or, the price at which a given product can be purchased immediately with no dispute or negotiation.

OPEC

The Organization of Petroleum Exporting Countries (OPEC) is a cartel made up of Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela; since 1965 its international headquarters have been in Vienna, Austria. Its principal aim is "the coordination and unification of the petroleum policies of its member countries and the determination of the best means for safeguarding their interests, individually and collectively; devising ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations; giving due regard at all times to the interests of the producing nations and to the necessity of securing a steady income to the producing countries; an efficient, economic and regular supply of petroleum to consuming nations, and a fair return on their capital to those investing in the petroleum industry."(Chap 1, Art. 2; Statute of OPEC)

Open Interest

For futures, the total number of contracts not yet liquidated by offset or delivery; i.e., the number of contracts outstanding. Open interest is determined by counting the number of transactions on the market (either the total contracts bought or sold, but not both). For futures options, the number of calls or puts outstanding; each type of option has its own open interest figure.

Open Market Operation

The buying and selling of government securities Treasury bills, notes, and bonds by the Federal Reserve.

Open Outcry

Method of public auction for making verbal bids and offers on the trading floors of the many futures exchanges.

Option

A contract that conveys the right, but not the obligation, to buy or sell a particular item at a certain price for a limited time. Only the seller of the option is obligated to perform.

Option Buyer

The purchaser of either a call or put option. Option buyers receive the right, but not the obligation, to assume a futures position. Also referred to as the holder.

Option Premium

The price of an option the sum of money that the option buyer pays and the option seller receives for the rights granted by the option.

Option Seller

The person who sells an option in return for a premium and is obligated to perform when the holder exercises his right under the option contract. Also referred to as the writer of the option.

Option Spread

The simultaneous purchase and sale of one or more options contracts, futures, and/or cash positions.

Option Writer

See Option Seller.

Out-of-the-Money Option

An option with no intrinsic value, i.e., a call whose strike price is above the current futures price or a put whose strike price is below the current futures price.

Overbought

A term used to describe a market where prices have risen relatively quickly-too quickly to be justified by the underlying fundamental factors.

Oversold

A term used to describe a market in where prices have dropped faster than the underlying fundamental factors would suggest they should.

P&S (Purchase and Sale) Statement

A statement sent by a commission house to a customer when his futures or options on futures position has changed, showing the number of contracts bought or sold, the prices at which the contracts were bought or sold, the gross profit or loss, the commission charges, and the net profit or loss on the transactions.

Payment-In-Kind (PIK) Program

A government program in which farmers who comply with a voluntary acreage-control program and set aside an additional percentage of acreage specified by the government receive certificates that can be redeemed for government-owned stocks of grain.

Performance Bond Margin

The amount of money deposited by both a buyer and seller of a futures contract or an options seller to ensure performance of the term of the contract. Margin in commodities is not a payment of equity or down payment on the commodity itself, but rather it is a security deposit.

Pit

The area on the trading floor where futures and options on futures contracts are bought and sold. Pits are usually raised octagonal platforms with steps descending on the inside that permit buyers and sellers of contracts to see each other.

Point-and-Figure Charts

A chart that plots day-to-day price movements without taking into consideration the passage of time. Point and figure charts are composed of a number of columns that consist of either a series of stacked Xs or a series of stacked Os. A column of Xs is used to illustrate a rising price, while Os represent a falling price. As you can see from the chart below, this type of chart is used to filter out non-significant price movements, and enables the trader to easily determine critical support and resistance levels. Traders will place orders when the price moves beyond identified support/resistance levels.

Position

A market commitment. A buyer of a futures contract is said to have a long position while, a seller of futures contracts is said to have a short position.

Position Limit

A predetermined position level set by regulatory bodies for a specific contract or option. Limits are created in order to maintain stable and fair markets. Each option or futures contract type will have differing position limits.

Position Trader

A trading strategy where the trader either buys or sells a market product and holds the position for an extended period of time.

Price Discovery

The process of determination of market prices through the interactions of buyers and sellers in a free marketplace.

Price Limit

The maximum advance or decline from the previous day's settlement price permitted for a contract in one trading session by the rules of the exchange.

Price Limit Order

A customer order that specifies the price at which a trade can be executed. Also called a limit order.

Primary Dealer

A designation given by the Federal Reserve System to commercial banks or broker/dealers who meet specific criteria. Among the criteria are capital requirements and meaningful, consistent participation in the Treasury auctions.

Primary Market

The part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is called an initial public offering (IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus.

Purchasing Hedge (or Long Hedge)

Buying futures contracts to protect against a possible price increase of cash commodities that will be purchased in the future. At the time the cash commodities are bought, the open futures position is closed by selling an equal number and type of futures contracts as those that were initially purchased. See Long Hedge.

Put Option

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