Glossary
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P
P&S (Purchase and Sale Statement): A statement sent by a commission house to a customer when any part of a futures position is offset, showing the number of contracts involved, the prices at which the contracts were bought or sold, the gross profit or loss, the commission charges, the net profit or loss on the transactions, and the balance.
Paper Profit or Loss: The profit or loss that would be realized if open contracts were liquidated as of a certain time or a certain price.
Par: (1) Refers to the standard delivery point(s) and/or quality of a commodity that is deliverable on a futures contract at contract price. Serves as a benchmark upon which the base discounts or premiums for varying quality and delivery locations. (2) In bond markets, an index (usually 100) representing the face value of a bond.
Path Dependent Option: An option whose valuation and payoff depends on the realized price path of the underlying asset, such as an Asian option or a Lookback option.
Pay/Collect: A shorthand method of referring to the payment of a loss (pay) and receipt of a gain (collect) by a clearing member to or from a clearing organization that occurs after a futures position has been marked-to-market. See Variation Margin.
Payment-in-Kind: Refers to an alternative to cash payments to producers of various commodities under the U.S. Department of Agriculture acreage control program authorized by Congress in 1985. The payments consisted of generic certificates which could be exchanged for commodities held in government warehouses or redeemed for equivalent monetary value.
Pegged Price: The price at which a commodity has been fixed by agreement.
Pegging: Effecting commodity transactions to prevent a decline in the price of the commodity so that previously written put options will expire worthless, thus protecting premiums previously received.
Pit: A specially constructed arena on the trading floor of some exchanges where trading in futures is conducted. On other exchanges the term "ring" designates the trading area for a futures. The area is described as a “pit” because it is octagonal with steps descending into the center. Traders stand on the various steps, which designate the contract month, or as in the case of the S&P 500, the number of contracts being traded. See Ring.
Pit Brokers: See Floor Broker.
Point: A measure of price change equal to 1/100 of one cent in most futures traded in decimal units. In grains, it is of one cent; in T-bonds, it is one percent of par. See Tick.
Point-And-Figure: A method of charting which uses prices to form patterns of movement without regard to time. It defines a price trend as a continued movement in one direction until a reversal of a predetermined criterion is met.
Point Balance: A statement prepared by futures commission merchants to show profit or loss on all open contracts by computing them to an official closing or settlement price, usually at calendar month end.
Pork Bellies: One of the major cuts of the hog carcass that, when cured, becomes bacon.
Portfolio: The group of investments held by an investor.
Portfolio Insurance: A trading strategy which attempts to alter the nature of price changes in a portfolio to substantially reduce the likelihood of returns below some predetermined level for an established period of time. This can be achieved by moving assets among stocks, cash and fixed-income securities or, with the advent of stock index futures contracts, by hedging a stock-only portfolio by selling stock index futures in a declining market or purchasing futures in a rising market. The objective is to create an exposure similar to that of a stock portfolio with a protective purchased put option.
Position: An interest in the market, either long or short, in the form of one or more open contracts. Also, "in position" refers to a commodity located where it can readily be moved to another point or delivered on a futures contract. Commodities not so situated are "out of position." Soybeans in Mississippi are out of position for delivery in Chicago, but in position for export shipment from the Gulf.
Position Limit: The maximum position, either net long or net short, in one futures (or option) or in all futures (or options) of one commodity or financial instrument combined which may be held or controlled by one person as prescribed by an exchange and/or by the CFTC.
Position Trader: A futures trader who either buys or sells contracts, and holds them for an extended period of time, as distinguished from the day trader, who will normally initiate and offset a futures position within a single trading session.
Positive Carry: The cost of financing a financial instrument (the short-term rate of interest), where the cost is less than the current return of the financial instrument. See Carrying Charges and Negative Carry.
Posted Price: An announced or advertised price indicating what a firm will pay for a commodity or the price at which the firm will sell it.
Prearranged Trading: Trading between brokers in accordance with an expressed or implied agreement or understanding, which is a violation of the Commodity Exchange Act and CFTC regulations.
Premium: (1) the amount a price would be increased to purchase a better quality commodity; (2) refers to a futures delivery month selling at a higher price than another, as "July is at a premium over May;" (3) cash prices that are above the futures price, such as in foreign exchanges. If the forward rate for Italian lira is at a premium to spot lira, it is selling above the spot price. See Contango, Discount; (4) the money, securities or property the buyer pays to the writer for granting an option contract.; (5) The price paid to purchase an option. This is also the money received when an option is written (sold).
Price Basing: A situation where producers, processors, merchants or consumers of a commodity establish commercial transaction prices based on the futures prices for that or a related commodity (e.g., an offer to sell corn at 5 cents over the December futures price). This phenomenon is commonly observed in grain and metal markets.
Price Discovery: The process of determining the price level for a commodity or financial instrument based on supply and demand factors.
Price Manipulation: Any planned operation, transaction or practice calculated to cause or maintain an artificial price.
Price Movement Limit: See Limit (Up or Down).
Price Weighted Index: A stock index weighted by adding the price of one share of each stock included in the index, and dividing this sum by a constant divisor. The divisor is changed when a stock split or stock dividend occurs because these affect the stock prices.
Primary Market: (1) For producers, their major purchaser of commodities; (2) in commercial marketing channels, an important center at which spot commodities are concentrated for shipment to terminal markets; and (3) to processors, the market that is the major supplier of their commodity needs.
Principals' Market: A market where the ring dealing members act as principals for the transactions they conclude across the ring and with their clients.
Privileges: See Option.
Program Trading: The purchase (or sale) of a large number of stocks contained in or comprising a portfolio. Originally called "program" trading when index funds and other institutional investors began to embark on large-scale buying or selling campaigns or "programs" to invest in a manner which replicated a target stock index, the term now also commonly includes computer aided stock market buying or selling programs, portfolio insurance, and index arbitrage.
Prompt Date: The date on which the buyer of an option will buy or sell the underlying commodity (or futures contract) if the option is exercised.
Public: In trade parlance, non-professional speculators as distinguished from hedgers and professional speculators or traders.
Public Elevators: Grain elevators in which bulk storage of grain is provided for the public for a fee. Grain of the same grade but owned by different persons is usually mixed or commingled as opposed to storing it "identity preserved." Some elevators are approved by exchanges as "regular" for delivery on futures contracts.
Purchase and Sale Statement: See P&S.
Puts: Option contracts which give the holder the right but not the obligation to sell a specified quantity of a particular commodity, financial instrument, or other interest at a given price (the "strike price") prior to or on a future date. Also called "put option," they will have a higher (lower) value the lower (higher) the current market value of the underlying article is relative to the strike price.
Put Option: An option to sell a specified amount of an underlying commodity or financial instrument at an agreed price and time at any time until the expiration of the option. A put option is purchased to protect against a fall in price. The buyer pays a premium to the seller/grantor of this option. The buyer has the right to sell the underlying commodity or financial instrument or enter into a short position in the futures market if the option is exercised. A put is purchased in expectation of lower prices. If prices are expected to rise, a put may be sold. Also see Call Option.
Pyramiding: The use of profits on existing positions as margin to increase the size of the position, normally in successively smaller increments.
Q
Quick Order: See Fill or Kill Order.
Quotation: The actual price or the bid or ask price of either cash commodities or futures contracts.
R
Rally: An upward movement of prices. Same as Recovery.
Random Walk: An economic theory that price movements in the futures markets and in the securities markets are completely random in character (i.e., past prices are not a reliable indicator of future prices).
Range: The difference between the high and low price of a commodity or a futures contract during a given period.
Ratio Hedge: The number of options compared to the number of futures contracts bought or sold in order to establish a hedge that is risk neutral.
Ratio Spread: This strategy, which applies to both puts and calls, involves buying or selling options at one strike price in greater number than those bought or sold at another strike price.
Ratio Writing: When an investor writes more than one option to hedge an underlying futures contract. These options usually are written for different delivery months. Ratio writing expands the profit potential of the investor’s option position. Example: A trader would be ratio writing if he is long one September Silver contract and he writes (sells) two silver calls, one for December Delivery, the other for September.
Reaction: The downward price movement tendency of a commodity or futures contract after a price advance.
Recovery: An upward price movement after a decline. Same as Rally.
Registered Commodity Representative (RCR): A person registered with the exchange(s) and the CFTC, who is responsible for soliciting business, “knowing” the customers, collecting margin, submitting orders, and recommending and executing trades for customers. A registered commodity representative is sometimes called a “broker” or “account executive.”
Regular Warehouse: A processing plant or warehouse that satisfies exchange requirements for financing, facilities, capacity, and location and has been approved as acceptable for delivery of commodities against futures contracts. See Licensed Warehouse.
Replicating Portfolio: A portfolio of assets for which changes in value match those of a target asset. For example, a portfolio replicating a standard option can be constructed with certain amounts of the asset underlying the option and bonds. Sometimes referred to as a Synthetic Asset.
Reporting Level: Sizes of positions set by the exchanges and/or the CFTC at or above which futures traders or brokers who carry these accounts must make daily reports about the size of the position by commodity or financial security, by delivery month, and whether the position is controlled by a commercial or non-commercial trader.
Resistance: In technical trading, a price area where new selling will emerge to dampen a continued rise. Also see Support.
Resting Order: An order to buy at a price below or to sell at a price above the prevailing market that is being held by a floor broker or is resident on an electronic exchange waiting to be filled. Such orders may either be day orders or open orders.
Retender: In specific circumstances, some contract markets permit holders of futures contracts who have received a delivery notice through the clearing house to sell a futures contract and return the notice to the clearinghouse to be reissued to another long; others permit transfer of notices to another buyer. In either case, the trader is said to have retendered the notice.
Retracement: A reversal within a major price trend.
Reversal: A change of direction in prices. Also, for a person short the physical and long synthetic futures, borrowing to purchase the physical and shorting futures. This takes advantage of low interest rates and allows him to make delivery if necessary.
Reverse Conversion: With regard to options, a position created by buying a call option, selling a put option, and selling the underlying futures contract.
Riding the Yield Curve: Trading in an interest rate futures according to the expectations of change in the yield curve.
Ring: A circular area on the trading floor of an exchange where traders and brokers stand while executing futures trades. Some exchanges use pits rather than rings. See Pit.
Risk Factor: See Delta Value.
Risk/Reward Ratio: The relationship between the probability of loss and profit. This ratio is often used as a basis for trade selection or comparison.
Roll-Over: A trading procedure involving the shift of one month of a straddle into another future month while holding the other contract month. The shift can take place in either the long or short straddle month. The term also applies to lifting a near futures position and re-establishing it in a more deferred delivery month.
Round Lot: A quantity of the underlying equal in size to the corresponding futures contract for the underlying. See Even Lot.
Round Turn: A completed transaction involving both a purchase and a liquidating sale, or a sale followed by a covering purchase.
Rules: The principles for governing an exchange. In some exchanges, rules are adopted by a vote of the membership, while regulations can be imposed by the governing board.
S
Sample Grade: In commodities, usually the lowest quality of a commodity, too low to be acceptable for delivery in satisfaction of futures contracts.
Scale Down (or Up): To purchase or sell a scale down means to buy or sell at regular price intervals in a declining market. To buy or sell on scale up means to buy or sell at regular price intervals as the market advances.
Scalper: A speculator using live data on a fully electronic trading exchange or a trader on the trading floor of an exchange who buys and sells rapidly to take advantage of small price fluctuations, holding positions for only a short time during a trading session. Typically, a scalper will stand ready to buy at a fraction below the last transaction price and to sell at a fraction above, thus creating market liquidity. Scalpers buy and sell often; therefore, they make it possible for others to enter or exit the market quickly. The term scalper arises from the fact that these traders attempt to “scalp” a small amount on a trade.
Scalping: The practice of trading in and out of the market on very small price fluctuations. A person who engages in this practice is known as a scalper.
Security Deposit: See Margin.
Seller's Call: See Call.
Seller's Market: A condition of the market in which there is a scarcity of goods available and hence sellers can obtain better conditions of sale or higher prices. Also see Buyer's Market.
Seller's Option: The right of a seller to select, within the limits prescribed by a contract, the quality of the commodity delivered and the time and place of delivery.
Selling Hedge (or Short Hedge): Selling futures contracts to protect against possible decreased prices of commodities. Also see Hedging.
Series (of Options): Options of the same type (i.e., either puts or calls, but not both), covering the same underlying futures contract or physical commodity, having the same strike price and expiration date.
Settlement: The act of fulfilling the delivery requirements of the futures contract.
Settlement or Settling Price: The daily price at which the clearing house clears all trades and settles all accounts between clearing members of each contract month. Settlement prices are used to determine both margin calls and invoice prices for deliveries. The term also refers to a price established by the exchange to even up positions which may not be able to be liquidated in regular trading.
Sharpe Ratio: A measurement of trading performance calculated as the average return divided by the variance of those returns; named after William P. Sharpe.
Shipping Certificate: A negotiable instrument used by several futures exchanges as the futures delivery instrument for several commodities (e.g., soybean meal and white wheat). The shipping certificate is issued by exchange-approved facilities and represents a commitment by the facility to deliver the commodity to the holder of the certificate under the terms specified therein. Unlike an issuer of a warehouse receipt who has physical product in store, the issuer of a shipping certificate may honor its obligation from current production or through-put as well as from inventories.
Shock Absorber: A temporary restriction in the trading of stock index futures which becomes effective following a significant intraday decrease in stock index futures prices. Designed to provide an adjustment period to digest new market information, the restriction bars trading below a specified price level. Shock Absorbers are generally market specific and at tighter levels than circuit breakers.
Short: (1) The selling side of an open futures contract. This sale is a legally enforceable agreement to make delivery of a specific quantity and grade of a particular futures during a specified delivery period; (2) a trader whose net position in the futures market shows an excess of open sales over open purchases. (3) A person who has sold a contract short. See Long.
Short Covering: See Cover.
Short Hedge: See Selling Hedge.
Short Selling: Selling a futures contract with the idea of delivering on it or offsetting it at a later date.
Short Squeeze: See Squeeze.
Short the Basis: The purchase of futures as a hedge against a commitment to sell in the cash or spot markets. When a person or firm need to buy a commodity in the future, they can protect themselves against price increases by making a substitute purchase in the futures market. The risk this person now faces is the risk of a change in basis (cash price – futures price). The hedger is said to be short-the-basis because he will profit if the basis becomes more negative (weaker); For example, if a hedger buys a soybean futures contract a 525 when cash soybeans are 512, the basis is minus. 13. If this hedge is lifted with futures at 520 and cash at 500, the basis is minus .20, and the hedger has profited by the $.07 decrease in the basis. See Hedging.
Small Traders: Traders who hold or control positions in futures or options that are below the reporting level specified by the exchange or the CFTC.
Soft: A description of a price which is gradually weakening. Also refers to commodities such as sugar, cocoa, and coffee.
Soften: The process of a slowly declining market price.
Sold-Out-Market: When liquidation of a weakly-held position has been completed, and offerings become scarce, the market is said to be sold out.
Specialist System: A type of trading commonly used for the exchange trading of securities in which one individual or firm acts as a market-maker in a particular security, with the obligation to see that trading in that security is fair and orderly by offsetting temporary imbalances in supply and demand by trading for his own account. Also see Board Broker System and Free Crowd System.
Speculation: An attempt to profit from futures price changes through the purchase or sale of futures contracts. In the process, the speculator assumes the risk that the hedger is transferring, and provides liquidity in the market.
Speculative Bubble: A rapid, but usually short-lived, run-up in prices caused by excessive buying which is unrelated to any of the basic, underlying factors affecting the supply or demand for the commodity or financial instrument. Speculative bubbles are usually associated with a "bandwagon" effect in which speculators rush to buy the commodity or financial instrument(in the case of futures, "to take positions") before the price trend ends, and an even greater rush to sell the commodity or financial instrument (unwind positions) when prices reverse.
Speculative Limit: See Position Limit.
Speculative Position Limit: See Position Limit.
Speculator: In futures, an individual who does not hedge, but who trades with the objective of achieving profits through the successful anticipation of price movements.
Split Close: Term which refers to price differences in transactions at the close of any market session.
Spot: (1) Market of immediate delivery of the product and immediate payment. (2) The cash market price of a specific futures. (3) Also refers to a maturing delivery month of a futures contract.
Spot Commodity: (1) The actual commodity as distinguished from a futures contract: (2) sometimes used to refer to cash commodities available for immediate delivery. Also see Actuals or Cash Commodity.
Spot Month: See Current Delivery Month.
Spot Price: The price at which a physical commodity for immediate delivery is selling at a given time and place. See Cash Price.
Spread (or Straddle): The purchase of one futures delivery month against the sale of another futures delivery month of the same commodity (or financial security); the purchase of one delivery month of one commodity (or financial security) against the sale of that same delivery month of a different commodity (or financial security); or the purchase of one commodity ( or financial security) in one market against the sale of the commodity (or financial security) in another market, to take advantage of a profit from a change in price relationships. See also Arbitrage, Switch. The term spread is also used to refer to the difference between the price of a futures month and the price of another month of the same commodity (or financial instrument). A spread can also apply to options.
Squeeze: A market situation in which the lack of supplies tends to force shorts to cover their positions by offset at higher prices.
SRO: See Designated Self-Regulatory Organization.
Standby Commitment: A put option in Ginnie Mae trading which gives the holder the right, but not the obligation, to make delivery.
Stock Index Futures: Based on stock market indexes, including Standard and Poor’s 500, Value Line, NYSE Composite, the Dow Jones Industrial Average, and the Nikkei 22 Index, these instruments are used by investors concerned with price changes in a large number of stocks or with major long-term trends in the stock market indexes.
Stop-Close-Only Order: A stop order which can only be executed, if possible, during the closing period of the market. See also Market-on-Close Order.
Stop Limit Order: A stop limit order is an order that goes into force as soon as there is a trade at the specified price. The order, however, can only be filled at the stop limit price or better.
Stop Order: This is an order that becomes a market order when a particular price level is reached. A sell stop is placed below the market, a buy stop is placed above the market. Sometimes referred to as Stop Loss Order. Stop orders are also used to initiate positions. A buy stop order is activated by a bid or trade at or above the stop price. A sell order is triggered by a trade or offer at or below the stop price.
Straddle: See Spread.
Strangle: An option position consisting of the purchase or sale of put and call options having the same expiration but different strike prices.
Street Book: A daily record kept by futures commission merchants and clearing members showing details of each futures transaction, including date, price, quantity, market, commodity, futures, and the person for whom the trade was made.
Striking (Strike) Price (Exercise or Contract Price): The price, specified in the option contract, at which the underlying futures contract or commodity (or financial instrument) will move from seller to buyer.
STRIPS: Separate Trading of Registered Interest and Principal Securities. A book-entry system operated by the Federal Reserve permitting separate trading and ownership of the principal and coupon portions of selected Treasury securities. It allows the creation of zero coupon Treasury securities from designated whole bonds.
Strong Hands: When used in connection with delivery of commodities on futures contracts, the term usually means that the party receiving the delivery notice probably will take delivery and retain ownership of the commodity; when used in connection with futures positions, the term usually means positions held by trade interests or well-financed speculators.
Support: In technical analysis, a price area where new buying is likely to come in and stem any decline. Also see Resistance.
Swap: In general, the exchange of one asset or liability for a similar asset or liability for the purpose of lengthening or shortening maturities, or raising or lowering coupon rates, to maximize revenue or minimize financing costs. In securities, this may entail selling one issue and buying another in foreign currency, it may entail buying a currency on the spot market and simultaneously selling it forward. Swaps may also involve exchanging income flows; for example, exchanging the fixed rate coupon stream of a bond for a variable rate payment stream, or vice versa, while not swapping the principal component of the bond.
Swaption: An option to enter into a swap -- i.e., the right, but not the obligation, to enter into a specified type of swap at a specified future date.
Switch: Offsetting a position in one delivery month of a commodity or financial instrument and simultaneous initiation of a similar position in another delivery month of the same commodity or financial instrument, a tactic referred to as "rolling forward." See Arbitrage.
Synthetic Futures: A position created by combining call and put options. A synthetic long futures position is created by combining a long call option and a short put option for the same expiration date and the same strike price. A synthetic short futures is created by combining a long put and a short call with the same expiration date and the same strike price. Synthetic positions are a form of arbitrage and are similar to but not exactly the same as an outright futures position.
Systemic Risk: Market risk due to price fluctuations which cannot be eliminated by diversification.
