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Abandon

The act of an option holder in electing not to exercise or offset an option.

Actuals

The physical or cash commodity, as distinguished from commodity futures contracts. Also see Cash and Spot Commodity.

Arbitrage

Simultaneous purchase of cash commodities or futures in one market against the sale of cash commodities or futures in the same or a different market to profit from a discrepancy in prices. Also includes some aspects of hedging. See Spread, Switch.

At-the-Money

When an option's exercise price is the same as the current trading price of the underlying commodity, the option is at-the-money.

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Bear

One who expects a decline in prices. The opposite of "bull." A news item is considered bearish if it is expected to bring lower prices.

Bear Market

A market in which prices are declining.

Bear Spread

The simultaneous purchase and sale of two futures contracts in the same or related commodities with the intention of profiting from a decline in prices but at the same time limiting the potential loss if this expectation is wrong. In the agricultural products, this is accomplished by selling a nearby delivery and buying a deferred delivery.

Bear Vertical Spread

A strategy employed when an investor expects a decline in a commodity price but at the same time seeks to limit the potential loss if this expectation is wrong. This Spread requires the simultaneous purchase and sale of options of the same class and expiration date but different strike prices. For example, if call options are spread, the purchased option must have a higher exercise price than the sold option.

Bid

An offer to buy a specific quantity of a commodity at a stated price.

Black-Scholes Model

An option pricing formula initially derived by F. Black and M. Scholes for securities options and later refined by Black for options on futures.

Board of Trade

Any exchange or association, whether incorporated or unincorporated, 6f persons who are engaged in the business of buying or selling any commodity or receiving the same for sale on consignment

Box Transaction

An option position in which the holder has established a long call and a short put at one strike price and a short call and a long put at another strike price, all of which are in the same contract month in the same commodity.

Bull

One who expects a rise in prices. The opposite of "bear". A news item is considered bullish if it portends higher prices.

Bull Market

A market in which prices are rising.

Bull Spread

The simultaneous purchase and sale of two futures contracts in the same or related commodities with the intention of profiting from a rise in prices but at the same time limiting the potential loss if this expectation is 'wrong. In the agricultural commodities, this is accomplished by buying the nearby delivery and selling the deferred.

Bull Vertical Spread

A strategy used when an investor expects that the price of a commodity will go up but at the same time seeks to limit the potential loss should this judgment be in error. This strategy involves the simultaneous purchase and sale of options of the same class and expiration date but different strike prices. For example, if call options are spread, the purchased option must have a lower exercise price than the sold option.

Butterfly Spread

A three-legged spread in futures or options. In the options spread, the options have the same expiration date but differ in strike prices. For example, a butterfly spread in soybean call options might consist of two short calls at a $6.00 strike price, one long call at a $6.50 strike price, and one long call at a $5.50 strike price.

Buyer

A market participant who takes a long future position or buys an option. An option buyer is also called a taker, holder, or owner.

Buyer's Call

See Call.

Buying Hedge (or Long Hedge)

Hedging transaction in which futures contracts are bought to protect against possible increased cost of commodities. See Hedging.

Buy (or Sell) On Close

To buy (or sell) at the end of the trading session within the closing price range.

Buy (or Sell) On Opening

To buy (or sell) at the beginning of a trading session within the opening price range

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Called

Another term for "exercised" when the option is a call. The writer of a call must deliver the indicated underlying commodity when the option is exercised or called.

Call Option

A contract that entitles the buyer/taker to buy a fixed quantity of a commodity at a stipulated basis or striking price at any time up to the expiration of the option. The buyer pays a premium to the seller/grantor for this contract. A call option is bought with the expectation of a rise in prices. See Put Option.

Carrying Charges

Cost of storing a physical commodity or holding a financial instrument over a period of time. Includes insurance, storage, and interest on the invested funds as well as other incidental costs. It is a carrying charge market when there are higher futures prices for each successive contract maturity. If the carrying charge is adequate to reimburse the holder, it is called a "full charge." Also see Negative Carry, Positive Carry and Contango.

Cash Commodity

The physical or actual commodity as distinguished from the futures contract. Sometimes called Spot Commodity or Actuals.

Cash Market

The market for the cash commodity (as contrasted to a futures contract), taking the form of: (1) an organized, self-regulated central market (e.g., a commodity exchange); (2) a decentralized over-the-counter market; or (3) a local organization, such as a grain elevator or meat processor, which provides a market for a small region.

Cash Price

The price in the marketplace for actual cash or spot commodities to be delivered via customary market channels.

Charting

The use of graphs and charts in the technical analysis of futures markets to plot trends of price movements, average movements of price, volume of trading and open interest See Technical Analysis.

Chartist

Technical trader who reacts to signals read from graphs of price movements.

Closing-Out

Liquidating an existing long or short futures or option position with an equal and opposite transaction. Also known as Offset.

Closing Price (or Range)

The price (or price range) recorded in trading that takes place in the final moments of a day's trade that are officially designated as the "close."

Combination

Puts and calls held either long or short with different strike prices and expirations.

Commercial

An entity involved in the production, processing, or merchandising of a commodity.

Conversion

When trading options on futures contracts, a position created by selling a call option, buying a put option, and buying the underlying futures contract, where the options have the same strike price and the same expiration.

Cover

(1) Purchasing futures to offset a short position. Same as Short Covering. See Offset, Liquidation; (2) To have in hand the physical commodity when a short futures or leverage sale is made, or to acquire the commodity that might be deliverable on a short sale.

Covered Option

A short call or put option position which is covered by the sale or purchase of the underlying futures contract or physical commodities. For example, in the case of options on futures contracts a covered call is a short call position combined with a long futures position. A covered put is a short put position combined with a short futures position.

Cox-Ross-Rubinstein Option Pricing Model

An option-pricing logarithm developed by J. Cox, S. Ross and M. Rubinstein which can be adapted to include effects not included in the Black-Scholes model (e.g. early exercise and price supports).

Crop Year

The time period from one harvest to the next, varying according to the commodity (i.e., July 1 to June 30 for wheat; September 1 to August 31 for soybeans).

Crush Spread

In the soybean futures market, the simultaneous purchase of soybean futures and the sale of soybean meal and soybean oil futures to establish a processing margin. See Gross Processing Margin.

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Dealer Option

A put or call on a physical commodity, not originating on or subject to the rules of an exchange, in which the obligation for performance rests with the writer of the option. Dealer options are normally written by firms handling the underlying commodity and offered to public customers, although the reverse may also be true.

Deferred Futures

The futures contracts that expire during the most distant months. Also called Back Months.

Delta

See Delta Value.

Delta Margining

An option margining system used by some exchanges for exchange members and/or floor traders which equates the changes in option premiums with the changes in the price of the underlying futures contract to determine risk factors on which to base the margin requirements.

Delta Value

The expected change in an option's price given a one-unit change in the price of the underlying futures contract or physical commodity.

Derivative

A financial instrument, traded on or off an exchange, the price of which is directly dependent upon (i.e. "derived from") the value of one or more underlying securities, equity indices, debt instruments, commodities, other derivative instruments, or any agreed upon pricing index or arrangement (e.g., the movement over time of the Consumer Price Index or freight rates). Derivatives involve the trading of rights or obligations based on the underlying product, but do not directly transfer property. They are used to hedge risk or to exchange a floating rate of return for a fixed rate of return.

Diagonal Spread

A spread between two call options or two put options with different strike prices and different expiration dates.

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Exchange Risk Factor

The delta value of an option as computed daily by the exchange on which it is traded.

Exercise

To elect to buy or sell, taking advantage of the right (but not the obligation) conferred by an option contract.

Exercise (or Strike) Price

The price specified in the option contract at which the buyer of a call can purchase the commodity during the life of the option, and the price specified in the option contract at which the buyer of a put can sell the commodity during the life of the option.

Exotic Options

Any of a wide variety of options with non-standard pay out structures, including Asian options and Lookback options mostly traded in the over-the-counter market of the option.

Expiration Date

The date on which an option contract automatically expires: the last day an option can be exercised.

Extrinsic Value

See Time Value.

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Floor Broker

Any person who, in or surrounding any pit, ring, post or other place provided by a contract market for the meeting of persons similarly engaged, executes for another person any orders for the purchase or sale of any commodity for future delivery.

Floor Trader

An exchange member who executes his own trades by being personally present in the pit or place for futures trading. See Local.

Fundamental Analysis

Study of basic, underlying factors which will affect the supply and demand of the commodity being traded in futures contracts. See Technical Analysis.

Futures Contract

An agreement to purchase or sell a commodity for delivery in the future: (1) at a price that is determined at initiation of the contract; (2) which obligates each party to the contract to fulfill the contract at the specified price: (3) which is used to assume or shift price risk; and (4) which may be satisfied by delivery or offset.

Futures-equivalent

A term frequently used with reference to speculative position limits for options on futures contracts. The futures-equivalent of an option position is the number of options multiplied by the previous day's risk factor or delta for the option series. For example, 10 deep out-of-the-money options with a risk factor of 0.20 would be considered 2 futures-equivalent contracts. The delta or risk factor used for this purpose is the same as that used in delta-based margining and risk analysis systems.

Futures Price

(1) Commonly held to mean the price of a commodity for future delivery that is traded on a futures exchange. (2) The price of any futures contract.

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Grantor

The maker, writer, or issuer of an option contract who, in return for the premium paid for the option, stands ready to purchase the underlying commodity (or futures contract) in the case of a put option or to sell the underlying commodity (or futures contract) in the case of a call option.

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Hedge Ratio

Ratio of the value of futures a contract purchased or sold to the value of the cash commodity being hedged, a computation necessary to minimize basis risk.

Hedging

Taking a position in a futures market opposite to a position held in the cash market to minimize the risk of financial loss from an adverse price change; a purchase or sale of futures as a temporary substitute for a cash transaction that will occur later.

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Intercommodity Spread

A spread in which the long and short legs are in two different but generally related commodity markets. Also called an intermarket spread. See Spread.

Interdelivery Spread

A spread involving two different months of the same commodity. Also called an intracommodity spread. See Spread.

In-The-Money

A term used to describe an option contract that has a positive value if exercised. A call at $400 on gold trading at $410 is in-the-money 10 dollars.

Intracommodity Spread

See Spread and Interdelivery Spread.

Intrinsic Value

A measure of the value of an option or a warrant if immediately exercised. The amount by which the current price for the underlying commodity or futures contract is above the strike price of a call option or below the strike price of a put option for the commodity or futures contract.

Inverted Market

A futures market in which the nearer months are selling at prices higher than the more distant months; a market displaying "inverse carrying charges," characteristic of markets with supply shortages. See Backwardation.

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Leaps

Long-dated, exchange-traded options.

Lookback Option

An option whose payoff depends on the minimum or maximum price of the underlying asset during some portion of the life of the option.

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Naked Call

See Naked Option.

Naked Option

The sale of a call or put option without holding an offsetting position in the underlying commodity.

Naked Put

See Naked Option.

Nearbys

The nearest delivery months of a commodity futures market.

Nearby Delivery Month

The month of the futures contract closest to maturity.

Negative Carry

The cost of financing a financial instrument (the short-term rate of interest), when the cost is above the current return of the financial instrument. See Carrying Charges and Positive Carry.

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Opening Price (or Range)

The price (or price range) recorded during the period designated by the exchange as the official opening.

Opening, The

The period at the beginning of the trading session officially designated by the exchange during which all transactions are considered made "at the opening."

Open Interest

The total number of futures contracts long or short in a delivery month or market that have been entered into and not yet liquidated by an offsetting transaction or fulfilled by delivery. Also called Open Contracts or Open Commitments.

Open Order (or Orders)

An order that remains in force until it is cancelled or until the futures contracts expire. See Good 'Til Cancelled and Good This Week orders.

Open Outcry

Method of public auction required to make bids and offers in the trading pits or rings of commodity exchanges.

Option

(1) A commodity option is a unilateral contract which gives the buyer the right to buy or sell a specified quantity of a commodity at a specific price within a specified period of time, regardless of the market price of that commodity. Also see Put and Call (2) A term sometimes erroneously applied to a futures contract. It may refer to a specific delivery month, as the "July Option."

Option Buyer

The person who buys calls, puts, or any combination of calls and puts.

Option Grantor

The person who originates an option contract by promising to perform a certain obligation in return for the price of the option. Also known as Option Writer.

Out-Of-The-Money

A term used to describe an option that has no intrinsic value. For example, a call at $400 on gold trading at $390 is out-of-the money 10 dollars.

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Path Dependent Option

An option whose valuation and payoff depends on the realized price path of the underlying asset, such as an Asian option or a Lookback option

Premium

(1) The amount a price would be increased to purchase a better quality commodity; (2) refers to a futures delivery month selling at a higher price than another, as "July is at a premium over May"; (3) cash prices that are above the futures price, such as in foreign exchanges. If the forward rate for Italian lira is at a premium to spot lira, it is selling above the spot price. See Contango, Discount; (4) the money, securities or property the buyer pays to the writer for granting an option contract.

Put Option

An option to sell a specified amount of a commodity at an agreed price and time at any time until the expiration of the option. A put option is purchased to protect against a fall in price. The buyer pays a premium to the seller/grantor of this option. The buyer has the right to sell the commodity or enter into a short position in the futures market if the option is exercised. Also see Call Option.

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Rally

An upward movement of prices following a decline. Same as Recovery.

Random Walk

An economic theory that price movements in the commodity futures markets and in the securities markets are completely random in character (i.e., past prices are not a reliable indicator of future prices).

Range

The difference between the high and low price of a commodity during a given period.

Ratio Hedge

The number of options compared to the number of futures contracts taken in a position necessary to be a hedge; that is, risk neutral.

Ratio Spread

This strategy, which applies to both puts and calls, involves buying or selling options at one strike price in greater number than those bought or sold at another strike price.

Reverse Conversion

With regard to options, a position created by buying a call option, selling a put option, and selling the underlying futures contract.

Risk Factor

See Delta Value.

Risk/Reward Ratio

The relationship between the probability of loss and that of profit. This ratio is often used as a basis for trade selection or comparison.

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Seller's Option

The right of a seller to select, within the limits prescribed by a contract, the quality of the commodity delivered and the time and place of delivery.

Short Hedge

See Selling Hedge.

Short Selling

Selling a futures contract with the idea of delivering on it or offsetting it at a later date.

Short Squeeze

See Squeeze.

Short the Basis

The purchase of futures as a hedge against a commitment to sell in the cash or spot markets. See Hedging.

Spread (or Straddle)

The purchase of one futures delivery month against the sale of another futures delivery month of the same commodity; the purchase of one delivery month of one commodity against the sale of that same delivery month of a different commodity; or the purchase of one commodity in one market against the sale of that commodity in another market, to take advantage of and profit from a change in price relationships. See also Arbitrage, Switch. The term spread is also used to refer to the difference between the price of one futures month and the price of another month of the same commodity. A spread can also apply to options.

Straddle

See Spread.

Strangle

An option position consisting of the purchase or sale of put and call options having the same expiration but different strike prices.

Striking Price (Exercise or Contract Price)

The price, specified in the option contract, at which the underlying futures contract or commodity will move from seller to buyer.

STRIPS

Separate Trading of Registered Interest and Principal Securities. A book-entry system operated by the Federal Reserve permitting separate trading and ownership of the principal and coupon portions of selected Treasury securities. It allows the creation of zero coupon Treasury securities from designated whole bonds.

Straddle

See Spread.

Strangle

An option position consisting of the purchase or sale of put and call options having the same expiration but different strike prices.

Synthetic Futures

A position created by combining call and put options. A synthetic long futures position is created by combining a long call option and a short put option for the same expiration date and the same strike price. A synthetic short futures is created by combining a long put and a short call with the same expiration date and the same strike price.

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Technical Analysis

An approach to forecasting commodity prices which examines patterns of price change, rates of change, and changes in volume of trading and open interest, without regard to underlying fundamental market factors.

Theta

The derivative of the option price equation with respect to the remaining time to expiration of the option. A measure of the sensitivity of the value of the option to the passage of time.

Time Spread

The selling of a nearby option and buying of a more deferred option with the same strike price.

Time Value

That portion of an option's premium that exceeds the intrinsic value. The time value of an option reflects the probability that the option will move into-the-money. Therefore, the longer the time remaining until expiration of the option, the greater its time value. Also called Extrinsic Value.

Trade Option

A commodity option transaction in which the taker is reasonably believed by the writer to be engaged in business involving use of that commodity or a related commodity. See Commission Rule 32.4.

Trader

(1) A merchant involved in cash commodities; (2) a professional speculator who trades for his own account.

Transaction

The entry or liquidation of a trade.

Transferable Option (or Contract)

A contract which permits a position in the option market to be offset by a transaction on the opposite side of the market in the same contract.

Trend

The general direction, either upward or downward, in which prices have been moving.

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Volatility Quote Trading

Refers to the quoting of bids and offers on option contracts in terms of their implied volatilities rather than as prices.