Glossary
An order to buy or sell a futures contract at whatever price is obtainable when the order reaches the trading floor. Also called a market order.
An option whose exercise, or strike, price is closest to the futures price.
Market situation in which futures prices are lower in each succeeding delivery month. Also known as an inverted market. The opposite of contango.
The differential that exists at any time between the cash, or spot price of a given commodity and the price of the nearest futures contract for the same or a related commodity. Basis may reflect different time periods, product forms, qualities or locations. Cash minus futures equals basis.
The uncertainty as to whether the cash futures spread will widen or narrow between the time a hedge position is implemented and liquidated.
Market in which prices are in a declining trend.
A motion to buy a futures or option contract at a specified price. Opposite of offer.
1) An individual who is paid a fee or commission for acting as an agent in making contracts, sales, or purchases. 2) A floor broker is a person who actually executes trading orders on the floor of an exchange. 3) An account executive, registered commodity representative, or customers' man who deals with customers and their orders in commission house offices. See also Futures Commission Merchant.
Market in which prices are in an upward trend.
An option that gives the buyer (holder) the right, but not the obligation, to buy a futures contract (enter into a long futures position) for a specified price within a specified period of time in exchange for a onetime premium payment. It obligates the seller (writer) of an option to sell the underlying futures contract (enter into a short futures position) at the designated price, should the option be exercised at that price.
A supply contract between a buyer and a seller, whereby the buyer is assured that he will not have to pay more than a given maximum price. This type of contract is analogous to a call option.
The actual physical commodity. Sometimes called a spot commodity or actuals.
The market for a cash commodity where the actual physical product is traded.
An option package consisting of a series of purchased calls and sold puts creates a collar and provides price protection against rising prices to an energy user. The short puts in series require payout if prices fall. For an energy user, this payout is offset by lower energy costs. The net effect is a minimum cost of energy and, from the calls, a maximum cost for energy.
As defined by the CFTC, specifically enumerated agricultural commodities, all other goods and articles, except onions, and all services, rights, and interests in which contracts for future delivery are presently, or in the future may be, dealt.
COMMODITY FUTURES TRADING COMMISSION
A federal regulatory agency authorized under the Commodity Futures Trading Commission Act of 1974 to regulate 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. The CFTC is independent of the Cabinet departments.
A market situation in which prices are higher in the succeeding delivery months than in the nearest delivery month. Opposite of backwardation.
1) A term of reference describing a unit of trading for a commodity future or option. 2) An agreement to buy or sell a specified commodity, detailing the amount and grade of the product and the date on which the contract will mature and become deliverable.
To close out a short futures or options position.
The term has distinct meaning when used in connection with futures contracts. Delivery generally refers to the changing of ownership or control of a commodity under specific terms and procedures established by the exchange upon which the contract is traded. Typically, except for energy, the commodity must be placed in an approved warehouse, precious metals depository, or other storage facility, and be inspected by approved personnel, after which the facility issues a warehouse receipt, shipping certificate, demand certificate, or due bill, which becomes a transferable delivery instrument. A notice of intention to deliver usually precedes delivery of the instrument. After receipt of the delivery instrument, the new owner typically can take possession of the physical commodity, can deliver the delivery instrument into the futures market in satisfaction of a short position, or can sell the delivery instrument to another market participant who can use it for delivery into the futures market in satisfaction of his short position or for cash, or can take delivery of the physical himself.
The procedure differs for energy contracts. Bona fide buyers or sellers of the underlying energy commodity can stand for delivery. If a buyer or seller stands for delivery, the contract is held through the termination of trading. The buyer and seller each file a notice of intent to make or take delivery with their respective clearing members who file them with the Exchange. Buyers and sellers are randomly matched by the Exchange. The delivery payment is based on the contract's final settlement price.
The month specified in a given futures contract for delivery of the actual physical spot or cash commodity.
Financial instrument derived from a cash market commodity, futures contract, or other financial instrument. Derivatives can be traded on regulated exchange markets or overthecounter. For example, futures contracts are derivatives of physical commodities, options on futures are derivatives of futures contracts.
Price differences between classes, grades, and locations of different stocks of the same commodity.
A transaction in which the buyer of a cash commodity transfers to the seller a corresponding amount of long futures contracts, or receives from the seller a corresponding amount of short futures, at a price difference mutually agreed upon. In this way, the opposite hedges in futures of both parties are closed out simultaneously.
EXCHANGE OF FUTURES FOR PHYSICALS
A futures contract provision involving an agreement for delivery of physical product that does not necessarily conform to contract specifications in all terms from one market participant to another and a concomitant assumption of equal and opposite futures positions by the same participants at the time of the agreement.
The process of converting an options contract into a futures position.
The date and time after which trading in an options contracts terminates, and after which all contract rights or obligations become null and void.
A supply contract between a buyer and seller of a commodity, whereby the seller is assured that he will receive at least some minimum price. This type of contract is analogous to a put option.
A standard clause which indemnifies either or both parties to a transaction whenever events which the Exchange declares to be reasonably beyond the control of either party occur to prevent fulfillment of the terms of the contract.
A supply contract between a buyer and seller, whereby the buyer is obligated to take delivery and the seller is obligated to provide delivery of a fixed amount of a commodity at a predetermined price on a specified future date. Payment in full is due at the time of, or following, delivery. This differs from a futures contract where settlement is made daily, resulting in partial payment over the life of the contract.
A supply contract between a buyer and seller, whereby the buyer is obligated to take delivery and the seller is obligated to provide delivery of a fixed amount of a commodity at a predetermined price at a specified location. Futures contracts are traded exclusively on regulated exchanges and are settled daily based on their current value in the marketplace.
An option structured so that the buyer receives a futures contract guaranteeing delivery at the option strike price. The options are American options and can be exercised on any business day prior to its expiration.
The initiation of a position in a futures or options market that is intended as a temporary substitute for the sale or purchase of the actual commodity. The sale of futures contracts in anticipation of future sales of cash commodities as a protection against possible price declines, or the purchase of futures contracts in anticipation of future purchases of cash commodities as a protection against the possibility of increasing costs.
An option that can be exercised and immediately closed out against the underlying market for a cash credit. The option is inthemoney if the underlying futures price is above a call option's strike price, or below a put option's strike price.
1) The market position of a futures contract buyer whose purchase obligates him to accept delivery unless he liquidates his contract with an offsetting sale. 2) One who has bought a futures contract to establish a market position. 3) In the options market, position of the buyer of a call or put option contract. Opposite of short.
Purchase of futures against the future market price purchase or fixed price forward sale of a cash commodity to protect against price increases.
The amount of money or collateral deposited by a customer with his broker, or deposited by a broker with a clearing member, or by a clearing member with the Clearinghouse, for the purpose of insuring the broker or Clearinghouse against adverse price movement on open futures contracts. The margin is not partial payment on a purchase. 1) Initial margin is the minimum deposit per contract required by the broker when a futures position is opened. 2) Maintenance margin is a sum which must be maintained on deposit at all times. If the equity in a customers' account drops to, or under, that level because of an adverse price movement, the broker must issue a margin call to restore the customers' equity. Margins are set by the Exchange based on its analysis of price risk volatility in the market at that time. See variation margin.
Daily cash flow system used by U.S. futures exchanges to maintain a minimum level of margin equity for a given futures or options contract position by calculating the gain or loss in each contract position resulting from changes in the price of the futures or options contracts at the end of each trading day.
10,000 British thermal units. Measurement used to quantify natural gas.
Futures industry trade association which promulgates rules of conduct and mediates disputes between customers and brokers.
The difference between an individual or firm's open long contracts and open short contracts in any one commodity.
The declared price for a futures month sometimes used in place of a closing price when no recent trading has taken place in that particular delivery month; usually an average of the bid and asked prices.
The New York Mercantile Exchange is the premier market for energy and metals trading. This self-regulatory authority derives from regulations of the Commodity Futures Trading Commission (CFTC), which in turn is overseen by the U.S. Congress.
A motion to sell a futures or option contract at a specified price. Opposite of bid.
A contract which gives the holder the right, but not the obligation, to purchase or to sell the underlying futures contract at a specified price within a specified period of time in exchange for a onetime premium payment. The contract also obligates the writer, who receives the premium, to meet these obligations.
The initial deposit of funds, as good faith monies, at the outset of trading a futures contract in order to guarantee fulfillment of its obligations. Also known as initial margin.
An option which has no intrinsic value. For calls, an option whose exercise price is above the market price of the underlying future. For puts, an option whose exercise price is below the futures price.
The net total of a trader's open contracts, either long or short, in a particular underlying commodity.
1) The price or cost of an option determined competitively by buyers and sellers in open outcry trading on the exchange trading floor. 2) An upward adjustment in price allowed for delivery of a commodity of higher grade against a futures contract.
NYMEX trades two and soon three natural gas futures contracts. Henry Hub in Erath, Louisiana is a pipeline intersect for gas flowing to the East Coast. Permian Basin is located in El Paso, Texas that services the South Central area. Alberta Gas is the new index that will be serving the West Coast. Permian Basin gas has historically traded at lower prices than the Henry Hub gas. With different regional supply and demand factors along with limited transportation between the two hubs, the basis between the two price indices can be irregular. Hedging Permian gas with Henry Hub futures contracts is subject to significant basis risk.
An option which gives the buyer, or holder, the right, but not the obligation, to sell a futures contract at a specific price within a specific period of time in exchange for a onetime premium payment. It obligates the seller, or writer, of the option to buy the underlying futures contract at the designated price, should an option be exercised at that price. See call option.
Selling futures contracts to protect against possible decreased prices of commodities. Also see hedging.
The price established by the Exchange settlement committee at the close of each trading session as the official price to be used by the clearinghouse in determining net gains or losses, margin requirements, and the next day's price limits. The term "settlement price" is often used as an approximate equivalent to the term "closing price." The close in futures trading refers to a brief period at the end of the day, during which transactions frequently take place quickly and at a range of prices immediately before the bell. Therefore, there frequently is no one dosing price, but a range of prices. The settlement price is derived by calculating the weighted average of prices during that period.
1) The market position of a futures contract seller whose sale obligates him to deliver the commodity unless he liquidates his contract by an offsetting purchase. 2) A trader whose net position in the futures market shows an excess of open sales over open purchases. 3) The holder of a short position. 4) In the options market, the position of the seller of a call or a put option. The short in the options market is obliged to take a futures position if he is assigned for exercise. Opposite of long.
Term which describes onetime open market case transaction, where a commodity is purchased "on the spot" at current market rates. Spot transactions are in contrast to term sales, which specify a steady supply of product over a period of time.
The price at which the underlying futures contract is bought or sold in the event an option is exercised. Also called an exercise price.
The exchange of a sequence of cash flows that derive from two difference financial instruments. For example, the party receiving fixed in an ordinary Interest Rate Swap receives the excess of the fixed coupon payment over the floating rate payment. Of course, each payment depends on the rate, the relevant day count convention, the length of the accrual period, and the notional amount.
The stock, commodity, futures contract, or cash index against which the futures or options contract is valued.
The market's price range and movement within that range. The direction of the price move, whether up or down, is not relevant. Historic volatility indicates how much prices have changed in the past and is derived by using daily settlement prices for futures. Implied volatility measures how much the market thinks prices will change in the future, and is obtained from daily settlement prices for options.
The seller of an option. Also known as the grantor of the option.
