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Glossary
Search through rail, petroleum, biofuel, and commodity-market terms. Use the search field or browse by letter below.
Acetic Acid -An acid with the structure of C2H4O2. Acetyl groups are bound through an ester linkage to hemicellulose chains, especially xylans, in wood and other plants. The natural moisture present in plants hydrolyzes the acetyl groups to acetic acid, particularly at elevated temperatures.
Actuals -An actual physical commodity someone is buying or selling, e.g., soybeans, corn, gold, silver, Treasury bonds, etc. Also referred to as actuals.
Against Actuals -A transaction generally used by two hedgers who want to exchange futures for cash positions. Also referred to as "Exchange for Physicals " or "versus cash".
Assign -To make an option seller perform his obligation to assume a short futures position (as a seller of a call option) or a long futures position (as a seller of a put option).
At-the-Money Option -An option with a strike price that is equal, or approximately equal, to the current market price of the underlying futures contract.
B20 -A mixture of 20% biodiesel and 80% petroleum diesel based on volume.
Basis -The difference between the current cash price and the futures price of the same commodity. Unless otherwise specified, the price of the nearby futures contract month is generally used to calculate the basis.
Bear -Someone who thinks market prices will decline.
Bear Market -A period of declining market prices.
Bear Spread -In most commodities and financial instruments, the term refers to selling the nearby contract month, and buying the deferred contract, to profit from a change in the price relationship.
Bid -An expression indicating a desire to buy a commodity at a given price, opposite of offer.
Biodiesel -A biodegradable transportation fuel for use in diesel engines that is produced through the transesterfication of organically- derived oils or fats. It may be used either as a replacement for or as a component of diesel fuel.
Biofuels -Biomass converted to liquid or gaseous fuels such as ethanol, methanol, methane, and hydrogen.
Broker -A company or individual that executes OTC orders on behalf of financial and commercial institutions.
Brokerage Fee -A fee charged by a broker for executing a transaction.
Brokerage House -An individual or organization that solicits or accepts orders to buy or sell futures contracts or options on futures and accepts money or other assets from customers to support such orders. Also referred to as "commission house" or "wire house".
Bull -Someone who thinks market prices will rise.
Bull Market -A period of rising market prices.
Bull Spread -In most commodities and financial instruments, the term refers to buying the nearby month, and selling the deferred month, to profit from the change in the price relationship.
Butterfly Spread -The placing of two interdelivery spreads in opposite directions with the center delivery month common to both spreads.
Buying Hedge -Buyer 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.
Calendar Spread -The purchase of one delivery month of a given futures contract and simultaneous sale of another delivery month of the same commodity on the same exchange. The purchase of either a call or put option and the simultaneous sale of the same type of option with typically the same strike price but with a different expiration month.
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 deletes a customer's previous order.
Carrying Charge -For physical commodities such as grains and metals, the cost of storage space, insurance, and finance charges incurred by holding a 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 marketing year and remaining in storage at year's end. These stocks are "carried over" into the next marketing year and added to the stocks produced during that crop year.
Cash Commodity -An actual physical commodity someone is buying or selling, e.g., soybeans, corn, gold, silver, Treasury bonds, etc. Also referred to as actuals.
Cash Contract -A sales agreement for either immediate or future delivery of the actual product.
Cash Exchange -A Cash Exchange involves two mutually agreed upon transactions both executed between 2 parties, one party Buys futures and sells correlated cash product while the other party to the transactions sells futures and buys the correlated cash products.
Cash Market -A place where people buy and sell the actual commodities, i.e., grain elevator, bank, etc. Spot usually refers to a cash market price for a physical commodity that is available for immediate delivery. A forward contract is a cash contract in which a seller agrees to deliver a specific cash commodity to a buyer sometime in the future. Forward contracts, in contrast to futures contracts, are privately negotiated and are not standardized.
Cellulase -A family of enzymes that break down cellulose into glucose molecules.
Cellulose -A carbohydrate that is the principal component of wood. It is made of linked glucose molecules that strengthens the cell walls of most plants.
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 point-and-figure charts. Anticipating future price movement using historical prices, trading volume, open interest and other trading data to study price patterns.
Clear -The process by which a clearinghouse maintains records of all trades and settles margin flow on a daily mark-to-market basis for its clearing member.
Clearing Corporation -An independent corporation that settles all trades made at the Chicago Board of Trade acting as a guarantor for all trades cleared by it, reconciles all clearing member firm accounts each day to ensure that all gains have been credited and all losses have been collected, and sets and adjusts clearing member firm margins for changing market conditions.
Clearing Margin -Financial safeguards to ensure that clearing members (usually companies or corporations) perform on their customers' open futures and options contracts. Clearing margins are distinct from customer margins that individual buyers and sellers of futures and options contracts are required to deposit with brokers. See Customer Margin. Within the futures industry, financial guarantees required of both buyers and sellers of futures contracts and sellers of options contracts to ensure fulfilling of contract obligations. FCMs are responsible for overseeing customer margin accounts. Margins are determined on the basis of market risk and contract value. Also referred to as performance-bond margin.
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.
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.
Closing Price -The last price paid for a commodity on any trading day. The exchange clearinghouse determines a firm's net gains or losses, margin requirements, and the next day's price limits, based on each futures and options contract settlement price. If there is a closing range of prices, the settlement price is determined by averaging those prices. Also referred to as settle price.
Closing Range -A range of prices at which buy and sell transactions took place during the market close.
Commission Fee -A fee charged by a broker for executing a transaction. Also referred to as brokerage fee.
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 index, to name a few.
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.
Concurrent Indicators -Market indicators showing the general direction of the economy and confirming or denying the trend implied by the leading indicators.
Contract 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.
Contract Month -A specific month in which delivery may take place under the terms of a futures contract.
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.
Conversion Factor -A factor used to equate the price of T-bond and-note futures contracts with the various cash T_bonds and T-notes eligible for delivery. This factor is based on the relationship of the cash-instrument coupon to the required 6 percent deliverable grade of a futures contract as well as taking into account the cash instrument's maturity or call.
Cost of Carry (or Carry) -For physical commodities such as grains and metals, the cost of storage space, insurance, and finance charges incurred by holding a 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.
Coupon -The interest rate on a debt instrument expressed in terms of a percent on an annualized basis that the issuer guarantees to pay the holder until maturity.
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 -The purchase of soybean futures and the simultaneous sale of soybean oil and meal futures.
Current Yield -The ratio of the coupon to the current market price of the debt instrument.
Customer Margin -Within the futures industry, financial guarantees required of both buyers and sellers of futures contracts and sellers of options contracts to ensure fulfilling of contract obligations. FCMs are responsible for overseeing customer margin accounts. Margins are determined on the basis of market risk and contract value.Also referred to as performance-bond margin. Financial safeguards to ensure that clearing members (usually companies or corporations) perform on their customers' open futures and options contracts. Clearing margins are distinct from customer margins that individual buyers and sellers of futures and options contracts are required to deposit with brokers.
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 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 -A measure of how much an option premium changes, given a unit change in the underlying futures price. Delta often is interpreted as the probability that the option will be in-the-money by expiration.
Demand, Law of -The relationship between product demand and price.
Differentials -Price differences between classes, grades, and delivery locations of various stocks of the same commodity.
Discount Method -A method of paying interest by issuing a security at less than par and repaying par value at maturity. The difference between the higher par value and the lower purchase price is the interest.
Discount Rate -The interest rate charged on loans by the Federal Reserve Bank.
E-10 -A mixture of 10% ethanol and 90% gasoline based on volume.
E-85 -A mixture of 85% ethanol and 15% gasoline based on volume.
Energy crop -A crop grown specifically for its fuel value. These include food crops such as corn and sugarcane, and nonfood crops such as poplar trees and switchgrass.
Ethanol -(CH3CH2OH) A colorless, flammable liquid produced by fermentation of sugars. Ethanol is used as a fuel oxygenate. Ethanol is the alcohol found in alcoholic beverages.
Exchange for Physicals -A transaction generally used by two hedgers who want to exchange futures for cash positions. Also referred to as Against Actuals or Versus Cash.
Exercise -The action taken by the holder of a call option if he wishes to purchase the underlying futures contract or by the holder of a put option if he wishes to sell the underlying futures contract.
Exercise Price -The price at which the futures contract underlying a call or put option can be purchased (if a call) or sold (if a put). Also referred to as strike price.
Expiration Date -Options on futures generally expire on a specific date during the month preceding the futures contract delivery month. For example, an option on a March futures contract expires in February but is referred to as a March option because its exercise would result in a March futures contract position.
Extrinsic Value -The amount of money option buyer are willing to pay for an option in the anticipation that, over time, a change in the underlying futures price will cause the option to increase in value. In general, an option premium is the sum of time value and intrinsic value. Any amount by which an option premium exceeds the option's intrinsic value can be considered time value. Also referred to as time value.
Feed Ratio -A ratio used to express the relationship of feeding costs to the dollar value of livestock. Hog/Corn Ratio The relationship of feeding costs to the dollar value of hogs. It is measured by dividing the price of hogs ($/hundredweight) by the price of corn ($/bushel). When corn prices are high relative to pork prices, fewer units of corn equal the dollar value of 100 pounds of pork. Conversely, when corn prices are low in relation to pork prices, more units of corn are required to equal the value of 100 pounds of pork. Steer/Corn Ratio. The relationship of cattle prices to feeding costs. It is measured by dividing the price of cattle ($/hundredweight) by the price of corn ($/bushel). When corn prices are high relative to cattle prices, fewer units of corn equal the dollar value of 100 pounds of cattle. Conversely, when corn prices are low in relation to cattle prices, more units of corn are required to equal the value of 100 pounds of beef.
Fill-or Kill -A customer order that is a price limit order that must be filled immediately or canceled.
Financial Analysis Auditing Compliance Tracking System (FACTS) -The National Futures Association's computerized system of maintaining financial records of its member firms and monitoring their financial conditions.
Financial Instrument -There are two basic types: (1) a debt instrument, which is a loan with an agreement to pay back funds with interest; (2) an equity security, which is share or stock in a company.
Floor Broker (FB) -An individual who executes orders for the purchase or sale of any commodity futures or options contract on any contract market for any other person.
Floor Trader (FT) -An individual who executes trades for the purchase or sale of any commodity futures or options contract on any contract market for such individual's own account
Forward (Cash) Contract -A cash contract in which a seller agrees to deliver a specific cash commodity to a buyer sometime in the future. Forward contracts, in contrast to futures contracts, are privately negotiated and are not standardized.
Full Carrying Charge Market -A futures market where the price difference between delivery months reflects the total costs of interest, insurance, and storage.
Fundamental Analysis -A method of anticipating future price movement using supply and demand information.
Futures Commission Merchant (FCM) -An individual or organization that solicits or accepts orders to buy or sell futures contracts or options on futures and accepts money or other assets from customers to support such orders. Also referred to as "commission house" or "wire house".
Futures Contract -A legally binding agreement, made on the trading floor of a futures exchange, to buy or sell a commodity or financial instrument sometime in the future. Futures contracts are standardized according to the quality, quantity, and delivery time and location for each commodity. The only variable is price, which is discovered on an exchange trading floor.
Futures Exchange -A central marketplace with established rules and regulations where buyers and sellers meet to trade futures and options on futures contracts.
Hedger -An individual or company owning or planning to own a cash commodity, corn, soybeans, wheat, U.S. Treasury bonds, notes, bills etc. and concerned that the cost of the commodity may change before either buying or selling it in the cash market. A hedger achieves protection against changing cash prices by purchasing (selling)futures contracts of the same or similar commodity and later offsetting that position by selling (purchasing) futures contracts of the same quantity and type as the initial transaction.
Hedging -The practice of offsetting the price risk inherent in any cash market position by taking an equal but opposite position in the futures market. Hedgers use the futures markets to protect their business from adverse price changes.
Selling (Short) Hedge -Selling futures contracts to protect against possible declining prices of commodities that will be sold in the future. At the time the cash commodities are sold, the open futures position is closed by purchasing an equal number and type of futures contracts as those that were initially sold. and Purchasing (Long) Hedge - Buyer futures contracts to protect against a possible price increase of cash commodities that will e 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. Also referred to as a buying hedge.
High -The highest price of the day for a particular futures contract.
Holder -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 Option Buyer
Horizontal Spread -The purchase of either a call or put option and the simultaneous sale of the same type of option with typically the same strike price but with a different expiration month. also referred to as a calendar spread.
In-the-Money Option -An option having intrinsic value. A call option is in-the-money if its strike price is below the current price of the underlying futures contract. A put option is in-the-money if its strike price is above the current price of the underlying futures contract. The amount by which an option is in-the-money.
Initial Margin -The amount a futures market participant must deposit into his margin account at the time he places an order to buy or sell a futures contract. Also referred to as original margin.
Intercommodity Spread -The purchase of a given delivery month of one futures market and the simultaneous sale of the same delivery month of a different, but related, futures market.
Interdelivery Spread -The purchase of one delivery month of a given futures contract and simultaneous sale of another delivery month of the same commodity on the same exchange. Also referred to as an intramarket or calendar spread.
Intermarket Spread -The sale of a given delivery month of a futures contract on one exchange and the simultaneous purchase of the same delivery month and futures contract on another exchange.
Intrinsic Value -The amount by which an option is in-the-money. An option having intrinsic value. A call option is in-the-money if its strike price is below the current price of the underlying futures contract. A put option is in-the-money if its strike price is above the current price of the underlying futures contract.
Inverted Market -A futures market in which the relationship between two delivery months of the same commodity is abnormal.
Invisible Supply -Uncounted stocks of a commodity in the hands of wholesalers, manufacturers, and producers that cannot be identified accurately; stocks outside commercial channels but theoretically available to the market.
Limit Order -An order in which the customer sets a limit on the price and/or time of execution.
Liquid -A characteristic of a security or commodity market with enough units outstanding to allow large transactions without a substantial change in price. Institutional investors are inclined to seek out liquid investments so that their trading activity will not influence the market price.
Liquidate -Selling (or purchasing) futures contracts of the same delivery month purchased (or sold) during an earlier transaction or making (or taking) delivery of the cash commodity represented by the futures contract. Taking a second futures or options position opposite to the initial or opening position.
Long -One who has bought futures contracts or owns a cash commodity.
Long Hedge -Buyer futures contracts to protect against a possible price increase of cash commodities that will e 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. Also referred to as a buying hedge.
Margin -Financial safeguards to ensure that clearing members (usually companies or corporations) perform on their customers' open futures and options contracts. Clearing margins are distinct from customer margins that individual buyers and sellers of futures and options contracts are required to deposit with brokers. Within the futures industry, financial guarantees required of both buyers and sellers of futures contracts and sellers of options contracts to ensure fulfilling of contract obligations. FCMs are responsible for overseeing customer margin accounts. Margins are determined on the basis of market risk and contract value. Also referred to as performance-bond margin.
Margin Call -A call from a clearinghouse to a clearing member, or from a brokerage firm to a customer, to bring margin deposits up to a required minimum level.
Market Order -An order to buy or sell a futures contract of a given delivery month to be filled at the best possible price and as soon as possible.
National Futures Association (NFA) -An industrywide, industry-supported, self-regulatory organization for futures and options markets. The primary responsibilities of the NFA are to enforce ethical standards and customer protection riles, screen futures professional for membership, audit and monitor professionals for financial and general compliance rules and provide for arbitration of futures-related disputes.
Nearby (Delivery) Month -The futures contract month closest to expiration. Also referred to as spot month.
Offer -An expression indicating one's desire to sell a commodity at a given price; opposite of bid.
Open Interest -The total number of futures or options contracts of a given commodity that have not yet been offset by an opposite futures or option transaction nor fulfilled by delivery of the commodity or option exercise. Each open transaction has a buyer and a seller, but for calculation of open interest, only one side of the contract is counted.
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 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 Spread -The simultaneous purchase and sale of one or more options contracts, futures, and/or cash positions.
Option Writer -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 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.
Over-the-Counter Market -A market where products such as stocks, foreign currencies, and other cash items are bought and sold by telephone and other means of communications.
Position -A market commitment. A buyer of a futures contract is said to have a long position and, conversely, a seller of futures contracts is said to have a short position.
Position Day -According to the Chicago Board of Trade rules, the first day in the process of making or taking delivery of the actual commodity on a futures contract. The clearing firm representing the seller notifies the Chicago Board of Trade Clearing Service Provider that its short customers want to deliver on a futures contract.
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.
Resistance -A level above which prices have had difficulty penetrating.
Reverse Crush Spread -The sale of soybean futures and the simultaneous purchase of soybean oil and meal futures.
Selling Hedge or Short Hedge -Selling futures contracts to protect against possible declining prices of commodities that will be sold in the future. At the time the cash commodities are sold, the open futures position is closed by purchasing an equal number and type of futures contracts as those that were initially sold. The practice of offsetting the price risk inherent in any cash market position by taking an equal but opposite position in the futures market. Hedgers use the futures markets to protect their business from adverse price changes.
Short (noun) -One who has sold futures contracts or plans to purchase a cash commodity. (verb) Selling futures contracts or initiating a cash forward contract sale without offsetting a particular market position.
Short Hedge -Selling futures contracts to protect against possible declining prices of commodities that will be sold in the future. At the time the cash commodities are sold, the open futures position is closed by purchasing an equal number and type of futures contracts.
Speculator -A market participant who tries to profit from buying and selling futures and options contracts by anticipating future price movements. Speculators assume market price risk and add liquidity and capital to the futures markets.
Spot -Usually refers to a cash market price for a physical commodity that is available for immediate delivery.
Spot Month -The futures contract month closest to expiration. Also referred to as nearby delivery month.
Spread -The price difference between two related markets or commodities.
Spreading -The simultaneous buying and selling of two related markets in the expectation that a profit will be made when the position is offset. Examples include: buying one futures contract and selling another futures contract of the same commodity but different delivery month; buying and selling the same delivery month of the same commodity on different futures exchanges; buying a given delivery month of one futures market and selling the same delivery month of a different, but related, futures market.
Stop Order -An order to buy or sell when the market reaches a specified point. A stop order to buy becomes a market order when the futures contract trades (or is bid) at or above the stop price. A stop order to sell becomes a market order when the futures contract trades (or is offered) at or below the stop price.
Stop-Limit Order -A variation of a stop order in which a trade must be executed at the exact price or better. If the order cannot be executed, it is held until the stated price or better is reached again.
Strike Price -The price at which the futures contract underlying a call or put option can be purchased (if a call) or sold (if a put). Also referred to as exercise price.
Technical Analysis -Anticipating future price movement using historical prices, trading volume, open interest and other trading data to study price patterns.
Tick -The smallest allowable increment of price movement for a contract.
Time Value -The amount of money option buyer are willing to pay for an option in the anticipation that, over time, a change in the underlying futures price will cause the option to increase in value. In general, an option premium is the sum of time value and intrinsic value. Any amount by which an option premium exceeds the option's intrinsic value can be considered time value. Also referred to as extrinsic value.
Time-Stamped -Part of the order-routing process in which the time of day is stamped on an order. An order is time-stamped when it is (1) received on the trading floor, and (2) completed.
Variation Margin -During periods of great market volatility or in the case of high-risk accounts, additional margin deposited by a clearing member firm to an exchange.
Vertical Spread -Buying and selling puts or calls of the same expiration month but different strike prices.
Volatility -A measurement of the change in price over a given period. It is often expressed as a percentage and computed as the annualized standard deviation of the percentage change in daily price.
Writer -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 option seller.