Futures Dictionary

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    FUTURES & OPTIONS

    DICTIONARY

    Basic Terminology Page 2

    Options Terminology Page 10

    Regulatory Terminology Page 14

    Stock Index / Single-Stock Futures Page 18

    Technical Analysis Terminology Page 22

    Trading Strategies Terminology Page 26

    Futures and optionstrading terminologies

    The lingo o commodity utures trading can be oreign to many investors.MF Global has developed this handy reerence guide to translate common industryterminology or you. We cover utures and options on utures rom A to Z!

    Denitions are not intended to suggest the correct legal signicance or exactmeaning. They were collected rom several sources to help in your understandingo utures and options. This guide is not meant to be exhaustive. We encourageyou to pursue your utures and options education urther through many resourceswe oer through our web site, mglobal.com.

    M F G L O B A L F U T U R E S A N D O P T I O N S D I C T I O N A R Y

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    Basic Terminology

    Arbitrage

    The simultaneous purchase and sale o identicalor equivalent nancial instruments or commodityutures in order to benet rom a discrepancy intheir price relationship.

    AskA motion to sell. The same as oer. Indicates awillingness to sell a utures contract at a givenprice. (See Bid.)

    Back Month

    Futures delivery months other than the spot orront month (also called deerred months).

    BasisThe dierence between the current cash priceand the utures price o the same commodity.The basis is determined by the costs o actuallyholding the commodity versus contracting tobuy it or a later delivery (i.e. a utures contract).The basis is aected by other infuences as well,such as unusual situations in supply or demand.Unless otherwise specied, the price o the

    nearby utures contract month is generally usedto calculate the basis. (See Carrying Charge.)

    BrokerA person paid a ee or commission or executingbuy or sell orders or a customer. In commodityutures trading, the term may reer to: (1)Floor Broker - a person who actually executesorders on the trading foor o an exchange; (2)

    Account Executive or Associated Person - the

    person who deals with customers in the oceso Futures Commission Merchants; or (3) theFutures Commission Merchant.

    BidThe price that the market participants are willingto pay. A motion to buy a utures or optionscontract at a specied price. Opposite o oer.(Also see Ask.)

    BearOne who expects a decline in prices. Theopposite o a Bull. A bear attacks by strikinghis paw downward.

    Bear MarketA market in which prices are dropping.

    BullOne who expects prices to rise. The oppositeo Bear. A bull attacks by thrusting his hornsupward.

    Bull MarketA market in which prices are rising.

    Carrying Charge (Cost o Carry)For physical commodities such as grains andmetals, the cost o storage space, insurance,and nance charges incurred by holding aphysical commodity. In interest rate uturesmarkets, it reers to the dierential between

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    the yield on a cash instrument and the cost

    necessary to buy the instrument. (See Basis.)Cash CommodityAn actual physical commodity someone isbuying or selling, e.g., soybeans, corn, gold,silver, Treasury bonds, etc. Also reerred toas actuals.

    Cash MarketA place where people buy and sell theinstrument on which a utures contract isbased, such as a securities exchange, bank orgrain elevator. The terms spot and spotprice usually reer to the cash market priceor the underlying instrument that is availableor immediate del ivery.

    Cash PriceThe price o the actual physical commoditythat a utures contracts is based upon.

    CommodityAn article o commerce or a product that can

    be used or commerce. In a narrow sense,products traded on an authorized commodityexchange. Types o commodities includeagricultural products, metals, petroleum,oreign currencies, nancial instruments andindexes, to name a ew.

    Commodity Futures Trading

    Commission (CFTC)A ederal regulatory agency establishedunder the Commodity Futures TradingCommission Act, as amended in 1974,that oversees utures trading in the UnitedStates. The Commission is comprised o vecommissioners, one o whom is designatedas chairman, all appointed by the Presidentsubject to Senate conrmation, and isindependent o all cabinet departments.

    ContractUnit o trading or a nancial or commodityuture. Also, actual bilateral agreementbetween the parties (buyer and seller) o autures or options on utures transaction asdened by a utures exchange.

    Daily Trading LimitThe maximum price range set by theexchange each day or a contract. A tradinglimit does not halt trading, but rather, limitshow ar the price can move in a given day.

    Day OrderAn order that is placed or execution duringonly one trading session. I the order cannotbe executed (lled) that day, it automaticallyexpires at the close o the trading session.

    Day Trade/TradingThe purchase and sale o a utures or optionscontract during only one trading session. I

    the order cannot be executed during that

    session, it is automatically cancelled. A daytrader places and liquidates trades during onetrading session.

    Day TradersSpeculators who take positions in utures oroptions contracts and liquidate them prior tothe close o the same trading day.

    Deerred Month (AKA: Back Months)The more distant month(s) in which uturestrading is taking place, as distinguished rom

    the nearby (delivery) month.

    Deliverable Grades (AKA: ContractGrades)The standard grades o commoditiesor instruments listed in the rules o theexchanges that must be met when deliveringcash commodities against utures contracts.Grades are oten accompanied by a scheduleo discounts and premiums allowable ordelivery o commodities o lesser or greater

    quality than the standard called or by theexchange.

    DeliveryThe transer o the cash commodity rom theseller o a utures contract to the buyer o autures contract. Each utures exchange hasspecic procedures or delivery o a cashcommodity. Some utures contracts, such asstock index contracts, are cash settled.

    BASIC TERMINOLOGY

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    Delivery Month

    A specic month in which delivery may takeplace under the terms o a utures contract.Also reerred to as contract month orront month.

    Delivery PointsThe locations and acilities designatedby a utures exchange where stocks o acommodity may be delivered in ulllmento a utures contract, under proceduresestablished by the exchange.

    E-MiniA trademark o CME Group Inc., an E-miniis a contract that is traded exclusively on itselectronic trading acility. It is usually basedon a similar, larger contract but priced moreavorably or smaller investors with a reducedmargin requirement and smaller tick size ormultiplier.

    EquityAs used on a trading account statement,

    reers to the residual dollar value o a uturesor option trading account, assuming it wasliquidated at current prices.

    Exchange(See Futures Exchange.)

    Exchange or Physicals (EFP)A transaction in which the buyer o acash commodity transers to the seller acorresponding amount o long utures

    contracts, or receives rom the seller a

    corresponding amount o short uturescontracts, at a price dierence mutuallyagreed upon. In this way, the oppositehedges in utures o both parties are closedout simultaneously. Also called exchange outures or cash, AA (against actuals), or ex-pittransactions.

    Exchange RateThe price o one currency stated in terms oanother currency.

    Expiration cycleA term reerring to the quarterly expirationdates applicable to various classes oderivatives. There are three commonly usedcycles: January/April/July/October, February/May/August/November, and March/June/September/December.

    Expiration dateThe day on which all open positions in autures contract are transormed into delivery

    or receipt responsibilities or the underlyinginstrument. Oten used as a synonym orthe last day o trading in a given contract,although the expiration date may not actuallybe the last day o trading. For example,the last trading date would normally occuron a Friday or a contract with a Saturdayexpiration date.

    First Notice Day

    According to CME Group rules, the rstday on which a notice o intent to deliver acommodity in ulllment o a given monthsutures contract can be made by theclearinghouse to a buyer.

    Forex FuturesA shortened term or oreign exchangeutures, also known as FX or currency utures.Forex utures are exchange-traded contractsto buy or sell a specied amount o a currencyon a set uture date, at a specied price.

    Forward (Cash) ContractA cash contract in which a seller agrees todeliver a specic cash commodity to a buyersometime in the uture. Forward contracts,in contrast to utures contracts, are privatelynegotiated and are not standardized.

    Front Month(See Delivery Month.)

    Futures (Contract)A term used to designate all contractscovering the purchase and sale o nancialinstruments or physical commodities or uturedelivery on a utures exchange. A uturescontract is a legally binding obligation tobuy or sell the underlying product, asset orinstrument at some time in the uture, at aprice agreed upon today. Futures contractsare standardized according to the quality,quantity, and delivery time and location.

    BASIC TERMINOLOGY

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    Futures Commission Merchant

    A rm or person engaged in solicitingor accepting and handling orders or thepurchase or sale o utures contracts, subjectto the rules o a utures exchange and, who,in connection with solicitation or acceptanceo orders, accepts any money or securities tomargin any resulting trades or contracts. TheFCM must be licensed by the CommodityFutures Trading Commission.

    Futures ExchangeA central marketplace with established rulesand regulations where buyers and sellersmeet to trade utures and options onutures contracts.

    Good til Canceled (GTC)An order that is worked until it can be lled oruntil canceled. (See Open Order.)

    GradesVarious qualities o a commodity.

    HeavyA market in which prices are demonstratingeither an inability to advance, or a slighttendency to decline.

    HedgeThe purchase or sale o a utures contractas a temporary substitute or a cash market

    transaction to be made at a later date. Usually

    it involves opposite positions in the cashmarket and utures market at the same time.

    HedgerAn individual or company owning or planningto own a cash commodity such as corn,soybeans, wheat, U.S. Treasury bonds, notes,bills, etc. and who is concerned that the costo the commodity may change beore eitherbuying or selling it in the cash market. Ahedger achieves protection against changingcash prices by purchasing (selling) utures

    contracts o the same or similar commodityand later osetting that position by selling(purchasing) utures contracts o the samequantity and type as the initial transaction.

    HedgingThe practice o osetting the price riskinherent in any cash market position by takingan equal but opposite position in the uturesmarket. Hedgers use the utures markets toprotect their businesses rom adverse pricechanges. (See Selling (Short) Hedge andPurchasing (Long) Hedge.)

    Henry HubA natural gas pipeline hub in Louisiana thatserves as the delivery point or New YorkMercantile Exchange natural gas uturescontracts. It oten serves as a benchmark orwholesale natural gas prices across the U.S.

    Initial Margin

    The minimum value on deposit in an accountto establish a new utures or options position,or to add to an existing position. Initial marginamount levels dier by contract. MF Globalsets the level o initial margin required, andit may change at any time at MF Globalsdiscretion. Increases or decreases in initialmargin levels refect anticipated or actualchanges in market volatility. Also called initialperormance bond.

    Last Trading DayAccording to CME Group rules, the nal daywhen trading may occur in a given uturesor options contract month. Futures contractsoutstanding at the end o the last trading daymust be settled by delivery o the underlyingcommodity or securities or by agreement ormonetary settlement (in some cases by EFPs).

    Limit Move(See Daily Trading Limit.)

    Limit OrderAn order type that is to be lled at a speciedprice or better. A limit buy order is placed ator below market price, while a limit sell orderis placed at or above the current market price.

    BASIC TERMINOLOGY

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    Leverage

    The ability to control large dollar amountso a commodity or other asset with acomparatively small amount o capital.

    LiquidA characteristic o a security or commoditymarket with enough units outstanding toallow large transactions without a substantialchange in price.

    LiquidateSelling (or purchasing) utures contracts othe same delivery month purchased (or sold)during an earlier t ransaction. Or, making(or taking) delivery o the cash commodityrepresented by the utures contract.

    Long(1) One who has bought a utures contractto establish a market position; (2) a marketposition that obligates the holder to takedelivery; (3) one who owns an inventory ocommodities. (See Short.)

    Long HedgeThe purchase o a utures contract inanticipation o an actual purchase in the cashmarket. Used by processors or exporters asprotection against an advance in the cashprice. (See Hedge, Short Hedge.)

    Lot

    A unit o trading; one utures contract.

    Maintenance MarginThe minimum value that must be present inan account in order to continue to hold aposition. The maintenance margin is typicallyless than the initial margin, and also diersby contract. I the account alls below themaintenance margin requirement, the accountholder will receive a margin call. I he/shewishes to continue to hold the position, theywill be required to restore the account to theull initial margin level (not to the maintenancemargin level). Also known as the maintenanceperormance bond.

    Managed FuturesRepresents an asset class comprised oproessional money managers known ascommodity trading advisors (CTAs) whomanage client assets on a discretionary basis,using global utures markets as an investmentmedium.

    MarginSee Perormance Bond.

    Margin CallA demand rom a clearinghouse to a clearingmember, or rom a brokerage rm to acustomer, to bring margin deposits up toa minimum level required to support thepositions held. This can be done by either

    depositing more unds or osetting some or

    all o the positions held.Mark-To-Market (Marked-To-Market)A daily accounting entry that is the bedrocko regulated utures bookkeeping. Its theend-o-day adjustment made to tradingaccounts to refect prots and losses onexisting positions. In other words, winningsare credited and immediately available tothe account and losses are debited andimmediately owed. This brings integrity tothe marketplace because participants are not

    allowed to trade unless unds are available tocover the positions.

    Market Order (MKT)An order to buy or sell a specied commodity,including quantity and delivery month atthe best possible prices available, as soonas possible.

    Market-I-Touched (MIT) OrderA price order that automatically becomes a

    market order i the price is reached.Market on Close (MOC)An order to buy or sell at the end o thetrading session at a price within the closingrange o prices.

    BASIC TERMINOLOGY

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    Notional Value

    The underlying value (ace value), normallyexpressed is U.S. dollars, o the instrumentspecied in a utures contract.

    OerIndicates a willingness to sell a contract at agiven price; opposite to the bid. Also calledthe ask price.

    OsetTaking a second utures or options positionopposite to the initial or opening position.This means selling, i one has bought, orbuying, i one has sold, a utures or option ona utures contract. (See Liquidate.)

    Open OrderAn order that is good until it is canceled orexecuted. (See Good Tii Canceled.)

    Open OutcryMethod o public auction or making verbalbids and oers in the trading pits or rings o

    utures exchanges. (See Pit.)

    Or Better Order (OB)A type o a limit order in which the market isat or better than the limit specied. The termis oten used to help clariy that the order wasnot mistakenly given as a limit when it lookslike it should be a stop order.

    Perormance Bond (Margin)

    Funds that must be deposited as aperormance bond by a customer with hisor her broker, by a broker with a clearingmember, or by a clearing member, with theclearing house. The perormance bond helpsto ensure the nancial integrity o brokers,clearing members and the exchange as awhole.

    PitA specially constructed arena on the tradingfoor o some exchanges where trading ina utures contract is conducted. On someexchanges the term ring designates thetrading area or a commodity.

    PositionA market commitment. A buyer o an initialutures contract is said to have a long positionand, conversely, a seller o an initial uturescontract is said to have a short position.

    Price Discovery

    The generation o inormation aboututure cash market prices through theutures markets. It has been said that uturesmarkets are oten the place o original pricediscovery because thats where the buyersand sellers are brought together to determinethe price. As in any auction, the last price isconsidered to refect the sum total o opinionsabout what price an item should be valued.

    Risk Capital

    Capital that is not needed or ordinaryliving expenses.

    Round TurnA round turn counts both the buy and the sello a trade as one event. In a typical exchangevolume measurement, a one-contract tradebetween a buyer and seller would be countedas one round turn. From the customersperspective, a round turn represents two lledorders rom his or her brokerage rm - one totake a position and one to oset that position(i.e., same customer, dierent trades).

    Settlement PriceAlso reerred to as settle or closing price.I there is a closing range o prices, thesettlement price is determined by averagingthose prices. The exchange clearinghousedetermines a rms net gains or losses, marginrequirements, and the next days price limits,based on each utures and options contractsettlement price. Thinly traded options may

    be settled at a theoretical value.

    ScalpTo trade or small gains. Scalping normallyinvolves establishing and liquidating aposition quickly, usually within the same day,hour or even just a ew minutes.

    BASIC TERMINOLOGY

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    Short

    (1) The selling side o an open uturescontract; (2) a trader whose net position inutures or options shows an excess o opensales over open purchases. (See Long.)

    SideA side considers the buy and sell actions o atrade as separate events. Each matched trade,and each contract, has two sides - the buyerside and the seller side. Taken together, thesetwo sides equal one round turn. Measuringmatched trade volume per side counts

    volume on each side o the trade.

    SpeculatorOne who attempts to anticipate price changesand, through buying and selling uturescontracts, aims to make prots. A speculatordoes not use the utures market in connectionwith the production, processing, marketing orhandling o a product.

    Spot

    Market o immediate delivery o and paymentor the product. The terms spot and spotprice usually reer to the cash market priceor the underlying instrument that is availableor immediate del ivery.

    SpreadThe price dierence between two relatedmarkets or commodities.

    Spreading

    The simultaneous buying and selling o tworelated markets in the expectation that aprot will be made when the position is oset.Examples include: buying one utures contractand selling another utures contract o thesame commodity but dierent delivery month;buying and selling the same delivery montho the same commodity on dierent uturesexchanges; buying a given delivery montho one utures market and selling the samedelivery month o a dierent, but related,utures market.

    Stop OrderSometimes called a stop loss order, althoughit can be used to initiate a new position aswell as oset an existing position. Its anorder to buy or sell when the market reachesa specied price point. A sell stop is placedbelow the market, a buy stop above themarket.

    Stop Limit

    A variation o a stop order. A stop limit ordergoes into eect as soon as there is a trade atthe specied price. However, the order canonly be lled at the stop limit price or better.

    TickSmallest increment o price movementpossible in trading a given contract.

    Variable Price Limit

    A price limit schedule, determined by anexchange, that permits variations above orbelow the normally allowable price movementor any one trading day.

    Variation MarginPayment made on a daily or intraday basisby a clearing member to the clearingorganization based on adverse pricemovement in positions carried by the clearingmember, calculated separately or customerand proprietary positions.

    VolatilityA statistical measurement o the rate o pricechange o a utures contract, security, or otherinstrument underlying an option.

    VolumeThe number o contracts traded during aspecied period o time. It may be quoted asthe number o contracts traded or as the totalo physical units, such as bales or bushels,

    pounds or dozens.

    Underlying CommodityThe cash commodity underlying a uturescontract. Also, the commodity or uturescontract on which a commodity option isbased, and which must be accepted ordelivered i the option is exercised.

    BASIC TERMINOLOGY

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    Yield Curve

    A graphic representation o market yield ora xed income security plotted against thematurity o the security. The yield curve ispositive when long-term interest rates arehigher than short-term interest rates, and isinverted with long-term rates are lower thanshort-term rates.

    Zero CouponReers to a debt instrument that does notmake coupon payments, but, rather, isissued at a discount to par and redeemed

    at par at maturi ty.

    Zero-Sum GameOne participants gains result rom anotherparticipants equivalent losses. The netchange in the total invested capital amongparticipants is zero; it is just shited romone to another.

    BASIC TERMINOLOGY

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    Black-Scholes Model

    A mathematical ormula or calculatingthe value o an option. Initially developedby Fischer Black and Myron Scholes orsecurities options and later rened by Blackor options on utures.

    Butterfy SpreadA three-legged spread in utures oroptions. In the option spread, the optionshave the same expiration date but dierin strike prices. For example, a butterfyspread in soybean call options might

    consist o two short calls at a $7 strikeprice, one long call at a $7.50 strike price,and one long call at a $6.50 strike price.

    Calendar Spread(See Horizontal Spread.)

    CallAn option to buy a commodity, security, orutures contract at a specied price at anytime between the purchase and expiration

    o the option contract. In utures, a callgives the buyer the right but not theobligation to purchase or (go long) theunderlying utures contract at the strikeprice on or beore the expiration date.

    CalledAnother term or exercised whenthe option is a call. The writer o a call

    must deliver the indicated underlying

    commodity when the option is exercisedor called.

    Covered CallAn option spread position where callsare sold against a long position in theunderlying instrument. In essence, thetrader is limiting his prot on the longposition in exchange or receiving theoption premium. On option expirationday, the breakeven on the long utures islowered by the amount o option premium

    received, less commissions.

    Covered OptionA short call or put option position that iscovered by the sale or purchase o theunderlying utures contract or physicalcommodity. For example, in the case ooptions on utures contracts, a coveredcall is a short call position combined witha long utures position. A covered put is ashort put position combined with a shortutures position. Also called a coveredwrite. (See also Covered Call andCovered Put.)

    Covered PutAn option spread position where putsare sold against a short position in theunderlying instrument. In essence, thetrader is limiting his prot on the shortposition in exchange or receiving the

    Options Terminology

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    option premium. On option expiration day,

    the breakeven on the short utures is raised bythe amount o option premium received,less commissions.

    DeltaA measure o how much an optionpremium changes, given a unit change inthe underlying utures price. Delta oten isinterpreted as the probability that the optionwill be in-the-money by expiration.

    Exercise

    The action taken by the holder o a calloption i he or she wishes to purchase theunderlying utures contract or by the holdero a put option i he or she wishes to sell theunderlying utures contract.

    Exercise PriceThe price at which the utures contractunderlying a call or put option can bepurchased (i a call) or sold (i a put). Alsoreerred to as strike price.

    Expiration DateIn options trading, this is the last day anoption may be exercised into the underlyingutures contract.

    Extrinsic Value(See Time Value.)

    Gamma

    A measurement o how ast delta changes,given a unit change in the underlyingutures price.

    Grant(See Write.)

    Grantor(See Option Seller.)

    HolderOne who purchases an option.

    Horizontal SpreadThe purchase o either a call or put optionand the simultaneous sale o the same typeo option with typically the same strike pricebut with a dierent expiration month. Alsoreerred to as a calendar spread.

    In-the-Money OptionAn option with intrinsic value. A calloption is in-the-money i its strike price is

    below the current price o the underlyingutures contract. A put option is in-the-moneyi its strike price is above the current priceo the underlying utures contract. (SeeIntrinsic Value.)

    Intrinsic ValueThe amount by which an option isin-the-money.

    Long Options Value

    It is the combined value o all optionspurchased. It is marked-to-market. Optionsmarked to the last reported price.

    Naked OptionThe sale o a call or put option withoutholding an osetting position in theunderlying commodity. Also reerred to as anuncovered option, naked call, or naked put.

    Net Options ValueThe credit or debit value o all optionpositions combined. It is marked-to-market.

    OptionA contract giving the holder the right, but notthe obligation, hence, option, to buy (calloption) or sell (put option) a utures contractin a given commodity at a specied price atany time between now and the expiration othe option contract.

    Option Buyer

    The purchaser o either a call or put option.Option buyers receive the right, but not theobligation, to assume a utures position. Alsoreerred to as the holder.

    Option PremiumThe price o an option. For U.S. options, thesum o money that the option buyer paysand the option seller receives or the rightsgranted by the option.

    OPTIONS TERMINOLOGY

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    Option Seller

    The person who sells a call or put option inreturn or a premium, and is obligated to ulllthe terms o contract through delivery whenthe holder exercises his right under theoption contract. Also reerred to as theWriter or Grantor.

    Option SpreadThe simultaneous purchase and sale o oneor more options contracts, utures, and/orcash positions.

    Out-o-the-Money OptionAn option with no intrinsic value, i.e., a callwhose strike price is above the currentutures price or a put whose strike price isbelow the current utures price. Its value issolely time related.

    Premium(See Option Premium.)

    Put

    An option to sell a commodity, security, orutures contract at a specied price at anytime between the purchase and the expirationo the option contract. A put gives the optionbuyer the right but not the obligation to sell(go short) the underlying utures contract atthe strike price on or beore theexpiration date.

    Ratio Hedge

    The number o options compared to thenumber o utures contracts bought or sold inorder to establish a hedge that is risk neutral.

    Ratio SpreadThis strategy, which applies to both puts andcalls, involves buying or selling options atone strike price in greater number than thosebought or sold at another strike price.

    Short Options ValueThe total cost o purchasing back all shortoptions. It is marked-to-market. Marketmovement may cause bids and oers to beaway rom the last reported price.

    Spread(See Option Spread.)

    StraddleAn option position consisting o the purchase(or sale) o both calls and puts having thesame expiration and the same strike price.

    StrangleAn option position consisting o the purchase(or sale) o both puts and calls having thesame expiration but dierent strike prices.

    Strike Price(See Exercise Price.)

    Synthetic Futures

    A position created by combining call and putoptions. A synthetic long utures position iscreated by combining a long call option anda short put option or the same expirationdate and the same strike price. A syntheticshort utures position is created by combininga long put and a short call with the sameexpiration date and the same strike price.

    ThetaA measure o the sensitivity o the value o theoption to the passage o time. In math terms,

    Theta is the derivative o the option priceequation with respect to the remaining timeto expiration o the option.

    Time ValueThe amount o money option buyers arewilling to pay, above the intrinsic value, oran option in the anticipation that, over time,a change in the underlying utures pricewill cause the option to increase in value. Ingeneral, an option premium is the sum o

    time value and intrinsic value. Any amountby which an option premium exceeds theoptions intrinsic value can be considered timevalue. Also reerred to as Extrinsic Value.

    Writer(See Option Seller.)

    OPTIONS TERMINOLOGY

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    Associated Person (AP)

    An individual who solicits orders, customers,or customer unds (or who supervises personsperorming such duties) on behal o a uturescommission merchant, an introducing broker, acommodity trading advisor, or a commoditypool operator.

    Audit TrailThe record o trading inormation identiying theparties involved in a transaction - the foor broker,clearing rm, customer, etc. - as well as the termsand time o the trade.

    Boiler RoomAn enterprise which oten is operated out oinexpensive, low-rent quarters (hence the termboiler room), that uses high pressure salestactics (generally over the telephone) andpossibly alse or misleading inormation to solicitgenerally unsophisticated investors.

    CFTC(See Commodity Futures Trading Commission.)

    Clearing MarginFinancial saeguards to ensure that clearingmembers (usually companies or corporations)perorm on their customers open utures andoptions contracts. Clearing margins are distinctrom customer margins that individual buyersand sellers o utures and options contracts

    are required to deposit with brokers. (SeeCustomer Margin.)

    Clearing Member

    A member o an exchange clearinghouse.Memberships in clearing organizations areusually held by companies. Clearing membersare responsible or the nancial commitments ocustomers that clear through their rm.

    ClearinghouseAn agency or separate corporation o a uturesexchange that is responsible or settling tradingaccounts, clearing trades, collecting andmaintaining margin monies, regulating delivery,and reporting trading data. Clearinghouses act as

    third parties to all utures and options contractsacting as a buyer to every clearing member sellerand a seller to every clearing member buyer.

    CommercialAn entity involved in the production, processing,or merchandising o a commodity.

    Commitments o Traders Report (COT)A weekly report rom the CFTC providing abreakdown o each Tuesdays open interest

    or markets in which 20 or more traders holdpositions equal to or above the reporting levelsestablished by the CFTC. Open interest is brokendown by aggregate commercial, non-commercial,and non-reportable holdings.

    Regulatory Terminology

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    Commodity Futures Trading Commission

    (CFTC)A ederal regulatory agency established underthe Commodity Futures Trading CommissionAct, as amended in 1974, that oversees uturestrading in the United States. The Commission iscomprised o ve commissioners, one o whomis designated as chairman, all appointed by thePresident subject to Senate conrmation, and isindependent o all cabinet departments.

    Commodity PoolSimilar to what a mutual und is to the

    securities industry. An enterprise in whichunds contributed by a number o persons arecombined or the purpose o trading utures oroptions on utures.

    Commodity Pool Operator (CPO)An individual or organization that operates orsolicits unds or a commodity pool.

    Commodity Trading Advisor (CTA)A person who, or compensation or prot,

    directly or indirectly advises others as to thevalue or the advisability o buying or sellingutures contracts or commodity options.Advising indirectly includes exercising tradingauthority over a customers account as well asproviding recommendations through writtenpublications or other media.

    Customer MarginWithin the utures industry, nancial guaranteesrequired o both buyers and sellers o utures

    contracts and sellers o options contracts toensure ulllment o contract obligations. FCMsare responsible or overseeing customermargin accounts.

    DeliveryThe transer o the cash commodity rom theseller o a utures contract to the buyer o autures contract. Each utures exchange hasspecic procedures or delivery o a cashcommodity. Some utures contracts, such asstock index contracts, are cash settled.

    Exchange(See Futures Exchange.)

    FCM(See Futures Commission Merchant.)

    Floor BrokerAn individual who executes orders or thepurchase or sale o any commodity utures oroptions contract on any contract market or anyother person. A foor broker executing ordersmust be licensed by the CFTC.

    Floor TraderAn exchange member who generallytrades only or his/her own account or or anaccount controlled by him/her. Also reerredto as a local.

    Futures Commission Merchant (FCM)A rm or person engaged in soliciting oraccepting and handling orders or the purchase

    or sale o utures contracts, subject to the ruleso a utures exchange and, who, in connectionwith solicitation or acceptance o orders, acceptsany money or securities to margin any resultingtrades or contracts. The FCM must be licensedby the CFTC.

    Futures ExchangeA central marketplace with established rules andregulations where buyers and sellers meet totrade utures and options on utures contracts.

    Give Up

    A contract executed by one broker or the cliento another broker that the client orders to beturned over to the second broker. The brokeraccepting the order rom the customer collectsa ee rom the carrying broker or the use o theacilities. Oten used to consolidate many smallorders or to disperse large ones.

    Guaranteed Introducing Broker (GIB)An introducing broker that has entered into aguarantee agreement with a utures commissionmerchant (FCM), whereby the FCM agreesto be jointly and severally liable or all o theintroducing brokers obligations under theCommodity Exchange Act. By entering into theagreement, the introducing broker is relievedrom the necessity o raising its own capitalto satisy minimum nancial requirements. Incontrast, an independent introducing brokermust raise its own capital to meet minimumnancial requirements.

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    Initial Margin

    The minimum value on deposit in an accountto establish a new utures or options position,or to add to an existing position. Initial marginamount levels dier by contract. MF Globalsets the level o initial margin required, andit may change at any time at MF Globalsdiscretion. Increases or decreases in initialmargin levels refect anticipated or actualchanges in market volatility. Also called initialperormance bond.

    Introducing Broker (IB)

    A person or organization that solicits oraccepts orders to buy or sell utures contractsor commodity options but does not acceptmoney or other assets rom customers tosupport such orders.

    Maintenance MarginThe minimum value that must be present inan account in order to continue to hold aposition. The maintenance margin is typicallyless than the initial margin, and also diers

    by contract. I the account alls below themaintenance margin requirement, the accountholder will receive a margin call. I he/shewishes to continue to hold the position, theywill be required to restore the account to theull initial margin level (not to the maintenancemargin level). Also known as the maintenanceperormance bond.

    Margin(See Perormance Bond.)

    Margin Call

    A demand rom a clearinghouse to a clearingmember, or rom a brokerage rm to acustomer, to bring margin deposits up toa minimum level required to support thepositions held. This can be done by eitherdepositing more unds or osetting some orall o the positions held.

    Mark-To-Market (Marked-To-Market)A daily accounting entry that is the bedrocko regulated utures bookkeeping. Its theend-o-day adjustment made to trading

    accounts to refect prots and losses onexisting positions. In other words, winningsare credited and immediately available tothe account and losses are debited andimmediately owed. This brings integrity tothe marketplace because participants are notallowed to trade unless unds are available tocover the positions.

    National Futures Association (NFA)An industry-wide, industry-supported,

    sel-regulatory organization or utures andoptions markets. The primary responsibilitieso the NFA are to enorce ethical standardsand customer protection rules, screen uturesproessionals or membership, audit andmonitor proessionals or nancial and generalcompliance rules, and provide or arbitrationo utures-related disputes.

    Over-the-Counter (OTC)

    The trading o commodities, contracts, orother instruments not listed on any exchange.OTC transactions can occur electronicallyor over the telephone. Also reerred toas o-exchange.

    Perormance Bond (Margin)Funds that must be deposited as aperormance bond by a customer with hisor her broker, by a broker with a clearingmember, or by a clearing member, with theclearing house. The perormance bond helps

    to ensure the nancial integrity o brokers,clearing members and the exchangeas a whole.

    Position LimitThe maximum number o speculative uturescontracts one can hold as determined by theCommodity Futures Trading Commission and/or the exchange upon which the contract istraded. Also reerred to as trading limit.

    Registered RepresentativeA person employed by, and solicitingbusiness or, a commission house or uturescommission merchant.

    Reporting LevelSizes o positions set by the exchanges and/or the CFTC at or above which commoditytraders or brokers who carry these accountsmust make daily reports about the size o theposition by commodity, by delivery month,

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    and whether the position is controlled by acommercial or non-commercial trader.

    RulesThe principles or governing a uturesexchange. In some exchanges, rules areadopted by a vote o the membership, whileregulations can be imposed by the governingboard.

    Suitability RequirementA requirement that any investing strategy allwithin the nancial means and investment

    objectives o an investor.

    Wash TradingEntering into, or purporting to enter into,transactions to give the appearance thatpurchases and sales have been made, withoutincurring market risk or changing the tradersmarket position. The Commodity ExchangeAct prohibits wash trading. Also called RoundTrip Trading, Wash Sales.

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    Alpha CaptureAlpha reers to that part o a stocks riskand return that is attributable to the stockindividually, as apposed to the overallmarket. Alpha capture is a spread tradebetween a stock uture and a stock indexuture.

    American Depositary Receipt (ADR)A security that physically remains in aoreign country, usually in the custody o abank, but is traded in the U.S.

    ArbitrageThe simultaneous purchase and saleo identical or equivalent nancialinstruments or commodity utures in orderto benet rom a discrepancy in their pricerelationship.

    AskA motion to sell. The same as oer.Indicates a willingness to sell a utures

    contract at a given price. (See Bid.)

    BasisThe dierence between the current cashprice and the utures price o the samecommodity. The basis is determined by thecosts o actually holding the commodityversus contracting to buy it or a laterdelivery (i.e., a utures contract). The basis

    is aected by other infuences as well, suchas unusual situations in supply or demand.Unless otherwise specied, the price o thenearby utures contract month is generallyused to calculate the basis. (See CarryingCharge.)

    BidThe price that the market participants arewilling to pay. Opposite o oer.

    Broad-Based

    Generally reerring to an index, it indicatesthat the index is composed o a sucientnumber o stocks or o stocks in a variety oindustry groups to satisy certain economicor regulatory criteria. (See also Narrow-Based.)

    Carrying Charge (Cost To Carry)For physical commodities such as grainsand metals, the cost o storage space,insurance, and nance charges incurred

    by holding a physical commodity. Ininterest rate utures markets, it reers tothe dierential between the yield on a cashinstrument and the cost necessary to buythe instrument. (See Basis.)

    Cash MarketA place where people buy and sell theinstrument on which a utures contract is

    Stock Index and Single-StockFutures Terminology

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    based, such as a securities exchange, bank orgrain elevator. The terms spot and spotprice usually reer to the cash market priceor the underlying instrument that is availableor immediate del ivery.

    Cash PriceThe price o the actual underlying commoditythat a utures contracts is based upon. In thecase o single-stock utures, the price o theunderlying stock.

    Circuit Breakers

    A system o trading halts and price limits onequities and derivative markets designed toprovide a cooling-o period during large,intraday market movements.

    Cross-MarginingA procedure or margining related securities,options, and utures contracts jointly whendierent clearing houses clear each side othe position.

    Day TradersSpeculators who take positions in utures oroptions contracts and liquidate them prior tothe close o the same trading day.

    DerivativeA type o investment whose value dependson the value o other investments, indices orassets. Futures contracts and stock optionsare common types o derivatives.

    A single-stock utures contract is a derivativesecurity o the underlying stock on whichit is based.

    E-MiniA trademark o CME Group Inc., an E-miniis a contract that is traded exclusively on itselectronic trading acility. It is usually basedon a similar, larger contract but priced moreavorably or smaller investors with areduced margin requirement and smallertick size or multiplier.

    Exchange-Traded Fund (ETF)An ETF is a basket o securities designedto track an index yet trades like a stock. Forexample OneChicagos DIAMONDScontract is a uture on the DIAMONDsETF, which tracks the Dow Jones IndustrialAverage Index.

    ETF FuturesFutures contracts on exchange-traded Funds.ETFs have similar characteristics to single-stock utures, although the underlying securityis the und itsel rather than common stock ina specic company. Thus at expiration,the deliverable assets are shares in theunderlying ETF.

    Fair valueThe theoretical worth o a utures contract asdetermined by a mathematical model. Fairvalue is a popular calculation that quicklyshows the relationship between a stock

    index utures contract and the underlyingstock index. Traders use air value as a toolin determining whether the utures contractis overpriced or underpriced. MF Globalcalculates air value daily or the S&P 500 onour Web site.

    GLOBEXCME Groups global electronic tradingsystem. Globex has a number o all-electroniccontracts that run virtually around the clock.

    Hedge

    The purchase or sale o a utures contractas a temporary substitute or a cash markettransaction to be made at a later date. Usuallyit involves opposite positions in the cashmarket and utures market at the same time.

    Initial MarginThe minimum value on deposit in an accountto establish a new utures or options position,or to add to an existing position. Initial marginamount levels dier by contract. MF Globalsets the level o initial margin required, andit may change at any time at MF Globalsdiscretion. Increases or decreases in initialmargin levels refect anticipated or actualchanges in market volatility. Also called initialperormance bond.

    LeverageThe ability to control large dollar amountso a commodity with a comparatively smallamount o capital.

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    Maintenance Margin

    The minimum value that must be present inan account in order to continue to hold aposition. The maintenance margin is typicallyless than the initial margin, and also diersby contract. I an account alls below themaintenance margin requirement, the accountholder will receive a margin call. I he or shewishes to continue to hold the position, theywill be required to restore the account to theull initial margin level (not to the maintenancemargin level). Also known as the maintenanceperormance bond.

    Market BasketA portolio o common stocks whoseperormance is intended to simulate theperormance o a specic index orother benchmark.

    Margin(See Perormance Bond.)

    Margin Call

    A demand rom a clearinghouse to a clearingmember, or rom a brokerage rm to acustomer, to bring margin deposits up toa minimum level required to support thepositions held. This can be done by eitherdepositing more unds or osetting some orall o the positions held.

    Narrow-BasedSimilar to a stock index uture, but targeted toa specic group o stocks, such as the auto,

    airline or telecom industries. Alsocalled industry-sector utures and exchange-traded baskets.

    OerIndicates a willingness to sell at a givenprice; opposite to the bid. Also called theask price.

    Pair TradingAnother term or spread trading but morespecically to securities products (stocksin particular) rather than commodities.

    Commonly reers to buying one stock andselling another related stock against it. Anexample would be spreading a Coca-Cola Co.single-stock uture against a Pepsico single-stock uture.( See also Spread Trade.)

    Perormance Bond (Margin)Funds that must be deposited as aperormance bond by a customer with hisor her broker, by a broker with a clearingmember, or by a clearing member, with theclearing house. The perormance bondhelps to ensure the nancial integrity obrokers, clearing members and theexchange as a whole.

    Physical DeliveryThe transer o the underlying commodityrom the seller o a utures contract to thebuyer o a utures contract. Each uturesexchange has specic procedures or deliveryo a physical commodity. Some utures

    contracts, such as stock index contracts,are cash settled.

    Position TraderAn approach to trading in which the tradereither buys or sells contracts and holds themor an extended period o time.

    Program TradingA catch-all phrase or trading activities thatinvolve the purchase (or sale) o a largenumber o stocks. The term commonlyincludes computer-aided stock market buying

    or selling programs, portolio insurance, andindex arbitrage.

    Sell ProgramsA specic type o index arbitrage that involvesthe simultaneous purchase o stock indexutures against the sale o a large number ostocks that comprise (or closely resemble)the index.

    Shock AbsorberA temporary restriction in the trading ostock index utures which becomes eectiveollowing a signicant intraday decreasein stock index utures prices. Designed toprovide an adjustment period to digestnew market inormation, the restriction barstrading below a specied price level. Shockabsorbers are generally market specic and attighter levels than circuit breakers.

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    Single-Stock Futures (SSF)

    Single-stock utures are an agreementbetween two parties that commits one partyto buy a stock and one party to sell a stock ata given price and on a specied date. Theyare similar to existing utures contracts orgold, crude oil, bonds, and stock indices.Unlike actual stock, there is no ownership orvoting rights contained in a SSF. (See alsoUniversal Stock Futures.)

    Spread TradeThe simultaneous buying and selling o two

    related markets in the expectation that aprot will be made when the position is oset.Examples include: buying one utures contractand selling another utures contract o thesame commodity but dierent delivery month;buying and selling the same delivery montho the same commodity on dierent uturesexchanges; buying a given delivery montho one utures market and selling the samedelivery month o a dierent, but related,utures market.

    Stock Index

    An indicator used to measure and reportvalue changes in a selected group o stocks.How a particular stock index tracks the marketdepends on its composition the sampling ostocks, the weighting o individual stocks, andthe method o averaging used to establishan index.

    Stock Index FuturesFutures contracts on a stock index, suchas the Standard & Poors 500 or the DowJones Industrial Average. Stock index utures

    contracts are a derivative o the underlyingindex, and are cash-settled.

    Systemic RiskMarket risk due to price fuctuations whichcannot be eliminated by diversication.

    Universal Stock FuturesSame as single-stock utures, but used to reerto those contracts that trade on the LIFFE.(See also Single-Stock Futures.)

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    Bar ChartA chart that graphs the high, low, andsettlement prices or a specic tradingsession over a given period o time.

    Bollinger BandAn indicator used to compare volatilityand relative price levels over a speciedtime period. Three bands are plotted: asimple moving average, an upper bando the simple moving average plus two

    standard deviations, and a lower bando the simple moving average minus twostandard deviations. When the marketsbecome more volatile, the bands widen, ormove arther away rom the average. Whenthe markets are less volatile, the bandscontract, or move closer to the average.

    Candlestick ChartCandlestick charts provide a quick visualpicture o the relationship betweenopening and closing prices and their

    relative strengths or weaknesses, especiallyor extended periods. The body, whichlooks like a candle, represents thedierence between opening and closingprices. Shadows, which look like wicks,represent price action above and belowthe body.

    ChannelThe range o prices between support andresistance levels that a market has tradedin or a specic time period.

    ChartingThe use o graphs and charts in thetechnical analysis o utures markets toplot price movements, volume, openinterest or other statistical indicators or

    price movement.

    Chaos Theory/TradingAlso called non-linear dynamics, chaostheory involves complex analysis but isessentially a tool to determine whetherrepetitive patterns and cycles exist inthe markets; that is, the presence o anunderlying order. It involves the studyo historical price action and use omathematical and statistical tools.

    Closing OutLiquidating an existing long or short uturesor options position with an equal andopposite transaction. Also called osetting.

    Technical AnalysisTerminology

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    Commitments o Traders Report (COT)

    A weekly report rom the Commodity FuturesTrading Commission providing a breakdowno each Tuesdays open interest or markets inwhich 20 or more traders hold positions equalto or above the reporting levels establishedby the CFTC. Open interest is broken downby aggregate commercial, non-commercial,and non-reportable holdings.

    CongestionA period o time characterized by repetitiousand limited price fuctuations.

    CorrectionA temporary reversal in prices ollowing asignicant trending period.

    Counter-Trend TradingThe method by which a trader takes a positioncontrary to the current market direction inanticipation o a change in that direction.

    Directional Movement Index (DMI)

    A trend-ollowing indicator used to determinemarket trends. It has three components--one or upward price movement, one ordownward price movement, and a third thatmeasures the dierence in these up-and-downmarket orces to arrive at an index showingthe strength o a trend.

    Double Bottom

    Chart pattern describing a drop in price,a rebound, and another drop to the sameor close to the level o the rst drop, thenanother rebound. The chart typically looks likea W in shape, and the two bottom points othe W represent support areas.

    Double TopChart pattern describing a rise in price, aall, another rise to the same or close to thelevel o the rst rise, then another all. Thechart typically looks like an M in shape,

    with the two top points o the M representingresistance areas.

    Elliott Wave TheoryA theory named ater Ralph Elliott, whocontended that stock market trends movein discernable and predictable patternsrefecting the basic harmony o nature.In technical analysis, it refects a chartingmethod based on the belie that all pricesact as waves, rising and alling rhythmicallyin a pattern o ve up and three down.Waves essentially refect psychology or themarketplace as it makes its normal ralliesand corrections.

    FibonacciLeonardo Fibonacci was a thirteenth-centuryItalian mathematician who discovered thesignicance and unique properties o a simplenumber series, in which each numeral is

    added to the previous to create the next onein the series: 0,1,2,3,5,8,13, etc. Fibonaccinumbers, and more signicantly the ratio othose numbers to each other, can be oundthroughout nature and cycles. Fibonacciratios are used in technical analysis to predictretracement areas during pullbacks, as wellas targets, called extensions, or projectedprice moves.

    Gann TheoryA method o predicting price movementsthrough the relationship o geometric angles

    in charts depicting time and price. Themethodology was created by W.D. Gann, anancial astrologer who was born in 1878 andbecame one o the most successul traders ohis time. Gann techniques can be complex,but are based on price study, time study andpattern study and operate under the premisethat markets are cyclical in nature.

    GapPrice areas on a chart where no trading takesplace. Gaps happen oten in markets that

    trade only part o a day because price-movingevents and announcements take place duringtimes when markets are closed. Follow-upprice action may cover them, or ll the gap.

    Head-and-ShouldersA chart ormation that resembles a humanhead-and-shoulders and is generallyconsidered to be predictive o a price

    TECHNICAL ANALYSIS TERMINOLOGY

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    reversal. A head and shoulders top (whichis considered predictive o a price decline)consists o a high price, a decline to thesupport level, a rally to a higher price thanthe previous high price, a second decline tothe support level, and a weaker rally to aboutthe level o the rst high price. The reverse(upside down) ormation is called a head andshoulders bottom (which is predictive o aprice rally).

    Liquid MarketA market in which selling and buying can be

    accomplished with minimal eect on price.

    MomentumThe relative change in price over a specictime interval. Oten equated with speedor velocity and considered in terms orelative strength.

    Moving AverageA statistical price analysis method orecognizing dierent trends. A movingaverage is calculated by adding the prices ora predetermined number o days and thendividing by the number o days.

    Moving Average Convergence/Divergence (MACD)MACD analysis uses three moving averages,oten exponential. Two o them are based onthe number o price periods used and thethird an average o the dierence betweenthe two moving averages. The dierence

    between the readings o the two movingaverages is usually shown as a histogram,while the average o that dierence is shownas a moving average line plotted on top othe histogram. An important part o MACDanalysis is how its movements compare withprice movements to determine strength orweakness in the market.

    Open InterestThe sum o all long or short utures contractsin one delivery month in one market thathave been entered into and not yet

    liquidated by an osetting transaction orullled by delivery.

    OscillatorA term or indicators used to determineoverbought and oversold conditions, otenuseul when a clear trend cant easily bedetermined. Oscillators include stochastics,moving average convergence/divergence,relative strength index and momentum.

    Overbought

    A term used to describe a technical opinionon a market that has risen too steeplyand too ast in relation to underlyingundamental actors.

    OversoldA term used to describe a technical opinion oa market has declined too steeply and too astin relation to underlying undamental actors.

    Parabolic Indicator

    A strategy that uses trailing stops and areverse method called stop-and-reversal (SAR)to pinpoint entry and exit points. Price actionabove the SAR would signal a bullish posture,price action below, a bearish posture.

    Point-and-Figure ChartA method o charting that uses prices toorm patterns o movement without regard totime. It denes a price trend as a continuedmovement in one direction until a reversal orpredetermined criterion is met. Xs are

    used to represent upticks, while Osrepresent downticks.

    RallyAn upward movement o prices.

    RangeThe dierence between the high and lowprice o a commodity during a given tradingsession, week, month, year, etc.

    Relative Strength Index (RSI)The Relative Strength Index compares periodswith up closes with periods that have downcloses to produce an index reading refectingthe strength o price changes on a scale o0 to 100. The index provides overbought oroversold signals, and divergence/convergencewith prices is an important part o the analysis.

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    Resistance

    A price area where new selling is expected toemerge to dampen a continued rise. Areas oresistance are ound above current prices.

    RetracementA move opposite the direction o the mainmarket trend.

    ReversalA change in the direction o prices.

    Squeeze

    A market situation in which the lack osupplies tends to orce shorts to cover theirpositions by osetting at higher prices.

    StochasticsThe stochastics indicator measures the closingprice relative to the low o the range or aselected period to indicate rising or alling

    momentum, providing trading signals whenits lines cross into overbought or oversoldterritory. As an overbought/oversold indicator,it attempts to orecast turns in market action.

    SupportThe place on a price chart where it isexpected buying o utures contracts will besucient to halt a price decline. Areas osupport are ound beneath current prices.

    Technical AnalysisAn approach to orecasting commodity prices

    that examines the patterns o price change,rates o change, and changes in volume otrading and open interest, without regard tounderlying undamental market actors.

    TrendThe general direction, either up or down, inwhich prices have been moving.

    Trendlines

    Lines drawn across successively higherbottoms in uptrending price action orprogressively lower tops in downtrendingprice action. Prices crossing a trendline mayindicate a change in direction has occurred.

    VolatilityA statistical measurement o the rate o pricechange o a utures contract, security, or otherinstrument underlying an option.

    Volume

    The number o contracts traded during aspecied period o time. It may be quoted asthe number o contracts traded or as the totalo physical units, such as bales or bushels,pounds or dozens.

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    Arbitrage

    The simultaneous purchase and sale oidentical or equivalent nancial instrumentsor commodity utures in order to benetrom a discrepancy in theirprice relationship.

    Black Box TradingBlack box trading, or automated trading,reers to the use o computerized systemswith buy and sell instructions generated bya proprietary sotware program. (See alsoSystematic Trading.)

    Bear SpreadThe simultaneous purchase and saleo two utures contracts in the same orrelated commodities with the intention oproting rom a decline in prices but atthe same time limiting the potential lossi this expectation does not materialize. Inagricultural products, this is accomplishedby selling a nearby delivery and buying adeerred delivery.

    Bull SpreadThe simultaneous purchase and saleo two utures contracts in the same orrelated commodities with the intention oproting rom a rise in prices but at thesame time limiting the potential loss ithis expectation is wrong. In agriculturalcommodities, this is accomplished bybuying the nearby delivery and sellingthe deerred.

    Cabinet Trade

    A trade that allows options traders toliquidate deep out-o-the-money optionsequal to less than one tick.

    Calendar Spread(See Horizontal Spread.)

    CallAn option to buy a commodity, security orutures contract at a specied price at anytime between the purchase and expirationo the option contract. A call gives the

    buyer the right, but not the obligation, topurchase (go long) the underlying uturescontract at the strike price on or beore theexpiration date.

    Computerized Trading System(See Systematic Trading.)

    ConvergenceThe tendency or cash and utures pricesto come together (i.e., the basis

    approaches zero) as the utures contractnears expiration.

    Trading Strategies Terminology

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    Contrarian

    Contrarian traders take positions against theprevailing market trend, that i s, buy, or golong, when prices are alling and sell, or goshort, when prices are rising. A contrariantrader may aim to prot rom a series osmall trades based on fuctuations withinthe prevailing trend, or may be anticipatinga change in direction based on momentumindicators or other analysis tools.

    Counter-TrendAgainst the prevailing trend. The market

    may make a short-term counter-trend movewithin a prevailing long-term trend. Counter-trend traders aim to take advantage o thistendency by buying when prices are low andselling when prices are high, or they may beanticipating a change in direction based onmomentum indicators or other analysis tools.

    Counter-Trend TradingThe method o trading by which a tradertakes a position contrary to the current market

    direction in anticipation o a change inthat direction.

    Covered CallAn option spread position where calls aresold against a long position in the underlyinginstrument. In essence, the trader is limitinghis prot on the long position in exchangeor receiving the option premium. On option

    expiration day, the breakeven on the longutures is lower by the amount o optionpremium received, less commissions.

    Covered OptionA short call or put option position whichis covered by the sale or purchase o theunderlying utures contract or physicalcommodity. For example, in the case ooptions on utures contracts, a covered callis a short call position combined with a longutures position. A covered put is a shortput position combined with a short utures

    position. Also called a covered write. (Seealso Covered Call and Covered Put.)

    Covered PutAn option spread position where puts aresold against a short position in the underlyinginstrument. In essence, the trader is limitinghis prot on the short position in exchangeor receiving the option premium. On optionexpiration day, the breakeven on the shortutures is raised by the amount o optionpremium received, less commissions.

    Day OrderAn order that is placed or execution duringonly one trading session. I the ordercannot be executed during that session, it isautomatically cancelled.

    Day TradeThe purchase and sale o a utures or options

    contract during only one trading session. Ithe order cannot be executed during thatsession, it is automatically cancelled. A daytrader places and liquidates trades during onetrading session.

    Day TradersSpeculators who take positions in utures oroptions contracts and liquidate them prior tothe close o the same trading day.

    DeltaA measure o how much an option

    premium changes, given a unit change inthe underlying utures price. Delta is oteninterpreted as the probability the option willbe in-the-money by expiration.

    DierentialsPrice dierences between classes, grades,and delivery locations o various supplies othe same commodity.

    Discretionary AccountAn arrangement by which the holder othe account gives written power oattorney to another person to make tradingdecisions. Also known as a controlled ormanaged account.

    ExerciseThe action taken by the holder o a calloption i he or she wishes to purchase the

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    underlying utures contract or by the holdero a put option i he or she wishes to sell theunderlying utures contract.

    Exercise PriceThe price at which the utures contractunderlying a call or put option can bepurchased (i a call) or sold (i a put). Alsoreerred to as strike price.

    Fill or Kill (FOK)An order that must be lled immediately ata specied price, or cancelled i not lled at

    that price.

    GammaA measurement o how ast delta changes,given a unit change in the underlyingutures price.

    Global MacroA strategy in which trading decisions arebased on global economic and politicalactors, that is, macroeconomic principles.

    Good til Canceled (GTC)An order worked until it can be lled or untilcanceled (See Open Order.)

    HedgeThe purchase or sale o a utures contractas a temporary substitute or a cash markettransaction to be made at a later date. Usually

    it involves opposite positions in the cashmarket and utures market at the same time.

    Horizontal SpreadThe purchase o either a call or a put optionand the simultaneous sale o the same typeo option with typically the same strike pricebut with a dierent expiration month. Alsoreerred to as a calendar spread.

    In-the-Money OptionAn option with intrinsic value. A call optionis in-the-money i its strike price is below

    the current price o the underlying uturescontract. A put option is in-the-money i itsstrike price is above the current price o theunderlying utures contract.

    Intrinsic ValueThe amount by which an option isin-the-money.

    Inverted MarketA utures market in which contracts nearerto expiration are priced higher thanthose in more distant months. Also calledbackwardation, an inverted market typicallyrefects a market acing a supply shortage.

    Limit Order (LMT)An order type that is to be lled at a speciedprice or better. A limit buy order is placed ator below market price, while a limit sell orderis placed at or above the current market price.

    Liquid

    A characteristic o a security or commoditymarket with enough units outstanding toallow large transactions without a substantialchange in price.

    LiquidateSelling (or purchasing) utures contracts othe same delivery month purchased (or sold)during an earlier transaction. Or, making(or taking) delivery o the cash commodityrepresented by the utures contract.

    Market DepthA dimension o market liquidity that reersto the ability o the market to handle largetrading volumes without a signicant impacton prices. Traders may study market depthto determine how and when particular ordersmay impact price action, and to help time theentry and exit o trades.

    Market NeutralA trading strategy that aims to prot rom

    both rising and alling prices, oten by takinga combination o long and short positions inone or more markets. True market neutralitymeans the expected beta, or market risk, isequal to zero. Traders who employ a marketneutral strategy are attempting to exploitmarket momentum.

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    Momentum

    The relative change in price over a specictime interval. Oten equated with speed orvelocity and considered in terms orelative strength.

    Naked OptionThe sale o a call or put option withoutholding an osetting position in theunderlying commodity. Also reerred to as anuncovered option, naked call, or naked put.

    NOB Spread (Notes over Bonds)

    A utures spread trade involving the buying(selling) o a 10-year U.S. Treasury note uturescontract and the selling (buying) o a U.S.Treasury bond utures contract.

    One Cancels Other (OCO) OrderA pair o orders, typically limit orders,whereby i one order is lled, the other orderwill automatically be cancelled.

    Open Order

    An order that remains in orce until it is lled,canceled or until the utures contract expires.

    Out-o-the-Money OptionA term used to describe an option that has nointrinsic value. For example, a call with a strikeprice o $800 on gold trading at $790 is out-o-the-money $10.

    Out-Trades

    A situation that results when there is someconusion or error on a trade, e.g., overdierence in the understanding o a priceat which a trade is done, or the number ocontracts traded.

    Position TraderAn approach to trading in which the tradereither buys or sells contracts and holds themor an extended period o time.

    Put

    An option to sell a commodity, security, orutures contract at a specied price at anytime between the purchase and the expirationo the option contract. A put gives the optionbuyer the right but not the obligation to sell(go short) the underlying utures contract atthe strike price on or beore theexpiration date.

    PyramidingThe use o prots on existing positions as

    margin to increase the size o the position,normally in successively smaller increments.

    Risk/Reward RatioThe relationship between the probability oloss and prot. This ratio is oten used as abasis or trade selection or comparison.

    Scale Down (or Up)

    To purchase or sell a scale down means to buyor sell at regular price intervals in a decliningmarket. To buy or sell on scale up means tobuy or sell at regular price intervals as themarket advances.

    ScalpTo trade or small gains. Scalping normallyinvolves establishing and liquidating aposition quickly, usually within the same day,hour or even just a ew minutes.

    Small TradersTraders who hold or control positionsin utures or options that are below thereporting level specied by the exchangeor the CFTC.

    SpreadingThe simultaneous buying and selling o tworelated markets in the expectation that aprot will be made when the position is oset.Examples include: buying one utures contract

    and selling another utures contract o thesame commodity but dierent delivery month;buying and selling the same delivery montho the same commodity on dierent uturesexchanges; buying a given delivery montho one utures market and selling the samedelivery month o a dierent, but related,utures market.

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    Speculative Bubble

    A rapid, but usually short-lived, run-up inprices caused by excessive buying whichis unrelated to any o the basic, underlyingactors aecting the supply or demand or thecommodity. Speculative bubbles are usuallyassociated with a bandwagon eect inwhich speculators rush to buy the commodity(in the case o utures, to take positions)beore the price trend ends, and an evengreater rush to sell the commodity (unwindpositions) when prices reverse.

    StraddleAn option position consisting o the purchaseor sale o put and call options with the sameexpiration date and the same strike prices.

    StrangleAn option position consisting o thepurchase or sale o put and call optionshaving the same expiration date but dierentstrike prices.

    Strong HandsWhen used in connection with delivery ocommodities on utures contracts, the termusually means that the party receiving thedelivery notice probably will take delivery andretain ownership o the commodity; whenused in connection with utures positions, theterm usually means positions held by tradeinterests or well-nanced speculators.

    Systematic Trading

    A mechanical means o trading in which acomputerized trading system is developedrom a mathematical ormula (containing agroup o specic rules, or technical-basedparameters) that determines entry and exitpoints or a given trade. These points, knownas signals, prompt a trade order. Tradingsystems are said to remove human emotionrom the trading process. Also calledalgorithmic trading.

    Time Value

    The amount option buyers are willing to pay,above the intrinsic value, or an option in theanticipation that, over time, a change in theunderlying utures price will cause the optionto increase in value. In general, an optionpremium is the sum o time value and intrinsicvalue. Any amount by which an optionpremium exceeds the options intrinsic valuecan be considered time and volatility value.Also reerred to as extrinsic value.

    Trading ArcadeA trading acility where independent traderscan gather or computerized trading, otenoperated by a clearing member.

    Trailing StopA technique oten used in attempt to protectprots without limiting potential gains bymoving a stop up or down with the market. Astop order would be raised on a long position

    in a bullish market, and lowered on a shortposition in a bear market. For example, a

    trader initiates a long utures position whenthe market is at $4, and places a protectivestop at $3. The market then rallies to $10. Heor she then moves the stop up to $9, exitingthe position i the market alls to $9.

    Trend-FollowingTrend ollowing is a strategy that ollows themarkets prevailing direction, buying whenprices are rising and selling when prices arealling. This presumes the prevailing trend

    will continue.

    Vertical SpreadBuying and selling puts or calls o the sameexpiration month but dierent strike prices.

    Volatility TradingStrategies designed to take advantage o thechanges in volatility o the market rather thanthe direction o the market.

    Weak HandsWhen used in connection with deliveryo commodities on utures contracts, theterms usually means that the party probablydoes not intend to retain ownership o thecommodity; when used in connection withutures positions, the term usually meanspositions held by small speculators.

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    Futures trading involves the substantial risk of loss and is not suitable for all investors.

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