Futures Trading Glossary - Commodities Terms & Definitions

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Futures Trading Glossary

Trading Glossary

These are the terms that are most commonly used in our trading room.

Listed in alphabetical order, these terms are not all inclusive but do represent those that are most commonly used. If you cannot find the term you are looking for or have comments about the terms, please let us know.

Move your pointer over the letter and click to take you directly to that alphabetical category.

  1. a
  2. b
  3. c
  4. d
  5. e
  6. f
  7. g
  8. h
  9. i
  10. j
  11. k
  12. l
  13. m
  14. n
  15. o
  16. p
  17. q
  18. r
  19. s
  20. t
  21. u
  22. v
  23. w
  24. x
  25. y
  26. z





A

American Option:
This is an option that can be exercised at any time before the expiry date.*European Option: This is an option that cannot be exercised at any time, only be exercised on the expiry date.

Associated Person (AP):
Who is registered with NFA and involved in the solicitation or facilitation of transacting customer orders.

At-the-Market:
Obtainable market price when you place an order, a sell order will trade at the bid. A buy order will trade at the offer or ask.

At-the-Money:
When the current strike price(option) and underlying commodity price are the same.




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B

Backwardation:
Backwardation or Normal Backwardation is the opposite market structure from Contango where the price of future contracts are lower than the spot price

Back Months:
If a commodity is available with expiry in June and October then October is the back month.

Bear Market:
If any market price drops more than 20% from it's recent highs. Falling prices represent a downtrend.

Bull Market:
Prices are rising or are expected to rise.

Broker:
Who executes orders on behalf of clients or help self-directed traders and charges them a commission.




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C

CFTC:
Commodity Futures Trading Commission (CFTC) is an independent agency sanctioned by the U.S. Congress that regulates commodity futures and options markets.

Churning:
Excessive trading by a broker in a client's account just to generate commissions.

Contango:
If the current price of a crude oil contract is $50 per barrel, but the price for delivery in six months is $60, that market would be in contango. The opposite of Normal Backwardation.

Commodity Trading Advisor (CTA):
Commodity futures asset manager providing advice includes exercising trading authority over a customer's account.




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D

Daily Price Limit:
The maximum price advance or decline in a day. If it happens, there can be no trading at any price until the next trading day.

Day Order:
Orders expire at the end of the trading session 4:00pm(CT) Monday -Friday for most markets with a few exceptions.

Day Trader:
Buying and selling within the same trading day(before 4:00pm CT).

Discretionary Account:
An account holder gives broker or someone else the authority to buy and sell commodity futures and Options.




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E

Expiration Date:
The date on which a futures option expires and the last day an option may be exercised.

Electronic Trading:
A manner of trading where orders are routed electronically from traders to a platform on which buyers and sellers are matched to complete transactions - as opposed to floor trading, where buyers and sellers complete transactions via verbal (shouting) and hand signal buy and sell orders.

Exchange:
A central marketplace where transactions are executed between buyers and sellers, typically among a variety of markets.

Exhaustion Gap:
The gap in the difference of an asset's price - typically an indication of high trading volume in a specific direction - followed by a reversal of the asset's price as a result of a sudden change in market sentiment.




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F

Futures Contract:
A legal agreement to buy or sell a specific commodity. The terms of the contract include a specific description of the quantity and quality of the commodity, as well as the date on which the buy/sell transaction is to be completed and often a list of the locations at which the transfer of the commodity can take place

First Notice Day:
The first day holders of a purchased/long position in a commodity futures contract may be notified - typically by the exchange on which the commodity is traded - that the physical commodity has been designated to be delivered.

Fungibility:
A commodity's ex-changeability or interchangeability with another commodity of specific similar characteristics.

Fundamental Analysis:
A type of evaluation that uses any available information - news, reports, data - as a collective indication of a commodity's current and potential change in value.




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G

Gamma:
A gauge of price movement in options. Gamma measures the rate of change of an option's delta, which is the difference between an option's price change compared to price change of the underlying asset.

Gap:
A difference in two prices that occurs between two time intervals with no other trading taking place between those two prices.

Give-Up:
A procedure whereby a trade/transaction is executed by one party (i.e., a broker, brokerage or clearing house) on behalf of another party and the executed trade/transaction is recorded as having been executed by that other party. The party executing the trade "gives up" any association with the trade/transaction (i.e., credit, commission).

Globex:
An electronic commodities trading platform formed by the Chicago Mercantile Exchange (CME). Introduced in 1992, it accounts for >80% of the CME's total trading volume, in itself the largest futures and options exchange in the world.

Good Faith Deposit:
The amount of cash required as a good faith to absorb losses in open futures contracts.




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H

Hedge:
In futures, a position in the market designed to counterbalance, protect or mitigate losses of another position.

Historical Volatility:
The speed or rate of change in an asset's price movement over a period of time.

Head and Shoulders:
In technical analysis, a price pattern defined by two price peaks/lows on either side of a higher/lower price peak/low - a chart formation believed to be a trend reversal pattern.




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I

Introducing Broker:
(A brokerage firm that introduces business to an FCM).

Interest Rates:
The costs of borrowing money.

ICE Exchange:
The first all electronic futures exchange.

Initial Margin:
The minimum amount of a good faith deposit required to initiate a futures position.

Intra Commodity Spread:
The purchase of one month and shorting of a different month within the same futures market.

Inter Commodity Spread:
The purchase of a contract in one futures market and shorting of another contract in a different futures market.




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J

Japanese Yen:
The official currency of Japan and one of the CME's futures contract.

Job Lot:
A smaller version of a regular sized futures contract.




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K

Kerb Trading:
Trading that occurs after the regular trading time.

Kansas City Wheat:
Usually a class of wheat called Hard Red Winter Wheat that is usually planted in the late fall and harvested in the late spring. Also a futures contract traded at the Chicago Mercantile Exchange.




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L

Leverage:
Controlling a large dollar amount of an asset on a small amount of security deposit.

Limit-Move:
When the price a futures contract goes up or down the most allowed in one day by a futures exchange.

Last Trading Day:
The day a futures contract expires and no more trading can take place.

Libor:
The London Inter-Bank Rate.

Live Cattle:
A futures contract listed on the Chicago Mercantile Exchange that represents 40,000 lbs of beef.

Lean Hogs:
A futures contract listed on the Chicago Mercantile Exchange that represents 40,000 lbs of pork.

LME:
London Metals Exchange




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M

Margin Call:
This occurs when a request/demand is made from a futures brokerage firm, such as Cannon Trading Co, to one of its clients to bring margin deposits up to initial levels for a particular futures contract/position.

Market Order:
A market order is an order to buy or sell a futures contract at whatever price is obtainable; (dependent upon the current bids/asks) at the time it is entered in the order book, ring, pit, or electronic trading platform.

Market-on-Opening:
A market-on-opening order is an order to buy or sell at the beginning of the trading session at a price within the opening range of prices.

Mini Contract:
This refers to a futures contract that has a smaller contract size than an otherwise identical futures contract of "full size". An example would be a Mini-Crude Oil contract of 500 barrels instead of the full 1,000 barrel contract size.




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N

Naked Option:
A naked option involves the sale of a call or put option without holding an equal and opposite position in the underlying instrument; in this case, a futures contract. This type of futures position is also referred to as an uncovered option, naked call, or naked put.

Nearby Delivery Month:
The month of the relevant futures contract that is closest to maturity; also referred to as the front month or lead month.

Notice Day:
This refers to any day on which notices of "intent to deliver" on futures contracts may/shall be issued.

Net Asset Value (NAV):
This value refers to each unit of participation in regards to a commodity pool.




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O

Open Interest:
The total number of those futures contracts that are long or short in a particular delivery month or market that has been entered into and not yet liquidated by executing an offsetting transaction or fulfilled by delivery of the futures contract. These are also referred to as open contracts or open commitments.

Open Trade Equity:
This refers to any unrealized gains or losses on open futures positions, (those futures positions that have not been offset).

Option Writer:
This refers to a person/trader who originates/initiates an option position by promising to perform a certain obligation in return for the price or premium of the option. This person can also be referred to as an option grantor or option seller.

Overbought:
In technical analysis, this refers to the opinion that the futures market price has risen too steeply and too quickly in relation to analyzed underlying economic fundamental factors. Many traders who had been bullish and had long positions have turned bearish and may enter short positions.




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P

Portfolio Insurance:
This refers to a trading strategy that utilizes stock index futures and/or stock index options to protect stock portfolios against market declines. This is a trading strategy that can be used to hedge positions in the equity markets using futures contracts.

Position Trader:
This refers to a commodity trader who either buys or sells futures contracts and holds them usually for an extended or longer period of time than a single trading session, as distinguished from a day trader, who will normally initiate and offset a futures position within a single trading session.

Price Discovery:
This refers to the market process of determining the price level for a commodity or futures contract through/by the interaction of buyers and sellers and based on supply and demand conditions in a particular market.

Pyramiding:
This refers to the strategy of utilizing profits/gains on existing positions as margin to increase the size of the open futures position. Normally this will be executed in successively smaller increments or sizes.





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Q

Quotation:
The last price or bid or ask for any commodity or futures price.




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R

Rally:
The act of the market rising. Price rally most common use.

Range:
When price stays between two levels of support and resistance; total price traveled in a certain time period.

Reaction:
Correction or retracement of trending direction.

Resistance:
A Level price has difficulty or expected difficulty exceeding.

Round Turn:
Both entering and exiting a position. A buy and a sell; two sides.




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S

Scalper:
A trader who trades rapidly or on smaller time frames.

Short:
Taking an interest in a negative price result. Opposite of long.

Short Selling:
Taking a short position with the intention to cover at lower prices.

Speculator:
Individual looking to profit from educated guessing not random chance.

Stop Order:
Order on long or short side to protect risk; also could be used to enter above or below market.

Support:
A Level price has difficulty or expected difficulty dropping below.




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T

Tick:
Smallest movement in price fluctuation.

Trader:
Individual who places trades or is responsible for the computer placing trades..

Trading Floor:
Floor where Traders gather to execute trading through hand signals.

Trend:
Detection of the recent price movement respective to the time frame.

Trend Line:
A diagonal slanted line following the direction of the trend.




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U

Unable:
Orders that have worked that have worked throughout the day but are Unable to fill because the market never traded through the orders price.

Uncovered Option:
The Sale of a put or a call without holding an equal or opposite position in the underlying futures contract.

Underlying Futures Contract:
A futures or option contract are based on underlying cash indexes, commodity markets or futures contracts in the case of options.

Up Trend:
When the trend in the market is Bullish. May be defined by a certain length of time..




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V

Variable Price Limit:
A schedule, determined by the exchange that permits variation above and below the allowable price limit during a particular time frame.

Vega:
The rate of change of an options premium given a 1% change in the volatility of the futures contract an option represents.

Vertical Spread:
Simultaneously buying and selling calls and puts of the identical expiration month but having different strike prices.

Volatility:
A measurement the of the change in price over a given period of time.

Volatility Trading:
Speculative strategies designed to benefit from changes in market price based on volatility, rather than market direction.

Volume:
Most commonly, the number of units traded during a specified period of time.




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W

Warehouse Receipt:
A Transfer of ownership instrument indicating the quantity, quality and location of a tangible commodity.

West Texas Intermediate (WTI):
The Benchmark of the U.S. Crude industry, WTI is a grade of crude oil, based on its Sulphur content, that is deliverable against the NYMEX, light, sweet crude futures contract.

Winter Wheat:
Wheat that is sown in the fall and is harvested in the late spring. Typically has a higher protein content than Spring wheat.

With Discretion:
Granting your broker time and price discretion to work your order using his or her good judgement.

Writer:
The seller, issuer or grantor of a futures option contract.




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Y

Yield:
A portion measured of the annual return on an investment translated as a percentage.

Yield Change:
A day's change in the futures' interest rate.

Yield Curve:
A chart in which yield level is plotted on the vertical axis, and the term to maturity of debt instruments of similar creditworthiness is plotted on the horizontal axis.

Yield-To-Maturity
Gain or loss client receives if client holds a fixed-income product to maturity.




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Z

Zero-Sum Game:
For every loser there is a winner, vice versa. One must lose for the other to win.

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