Glossary

Below is a list of futures, options, and technical analysis terms acquired from various sources

Abandon - The act of an option holder not to exercise or offset an option.

Actuals - The physical or cash commodity, as distinguished from a futures contract.

ADX - A Welles Wilder trading system. Commonly used to determine whether a market is trending, or moving sideways. A high ADX reading indicates a trending market. A rising ADX indicates a trending market (either up or down). If the ADX reaches 40 or greater, look for a signal that indicates the trend is over. An ADX of 20 or less indicates a sideways market.

Advance/Decline Line - Each day’s declining issues are subtracted from that day’s advancing issues. The difference is added to (subtracted from if negative) a running sum. Failure to this line to confirm a new high is a sign of weakness. Failure of this line to confirm a new low is a sign of strength.

American Option - An option that can be exercised on any business day before it expires.

Arbitrage - Simultaneous purchase of cash commodities or futures in one market against the sale of cash commodities or futures in a different market, to profit from a discrepancy in prices. In some definitions, arbitrage refers only to riskless transactions in which the entire investment is made with borrowed funds.

Area Pattern - When a commodity’s upward or downward trend has stalled, the sideways movement in price which follows forms a pattern. Some of these patterns may have predictive value. Examples of these patterns are head and shoulders, triangles, pennants, flags, wedges, and broadening formations.

Ascending Trend Channel - The tops of an ascending price line develop along a line parallel to the trend line which slopes upward across the bottoms of the down waves.

Ask - Also called "offer". Indicates a willingness to sell a futures contract at a given price. (See bid).

Assignment - The process by which the seller of an option is notified of the buyer's intention to exercise, thereby requiring the seller to take either an opposing short position, in the case of a call, or an opposing long position, in case of a put.

Associated Person (AP) - Category of persons, associated with firms or other entities, who must be registered under the Commodity Exchange Act.

At-The-Market - An order to buy or sell a futures contract at whatever price is obtainable when the order reaches the trading floor. Also called a Market Order.

At-The-Money - An option whose strike price equals the current price of the underlying commodity, security, currency, index or futures contract.

Back Months - The futures or options on futures months being traded that are furthest from expiration.

Back Testing - Optimizing a trading strategy on historical data and applying it to fresh data to see how well the strategy works.

Backwardation - Market situation in which futures prices are progressively lower in the distant delivery months. The opposite of contango, or carrying-charge, market.

Bar Chart - The most popular technical tool whereby each day (week, month or year) is represented by a single vertical bar on a chart. The bottom of the bar represents the low price, whereas the top of the bar represents the high price for the time period. A tick mark on the left side of the bar represents the opening price, while a mark on the right indicates the closing or settlement price. Trader examine the bar chart on a regular basis to identify particular patterns, which may help predict future price direction.

Basis - The difference between the spot or cash price of a commodity, security, currency or index and the futures price of the same or related underlying item. Basis is usually computed to the nearby future and may represent different time periods, product forms, grades and locations depending upon the cash and futures prices used.

Basis Contract - A cash marketing alternative whereby the buyer and seller agree upon the basis of the contract. Price is tied to a predetermined basis and the remaining component of the price (as tied to the futures

market) can be priced anytime prior to when the contract is satisfied by delivery. This type of cash contract eliminates basis risk but still has price risk.

Basis Grade - The grade of a commodity used as the standard of the futures contract.

Basis Risk - The risk associated with not being able to predict the basis accurately. Because futures and cash prices tend to move together over time, basis risk is usually less than price risk.

Bear - One who believes prices will move lower.

Bear Flag - See Flag Formations.

Bear Market - A market in which prices are declining.

Bear Spread - Short the nearby future and long the deferred, in anticipation of a decline in the general level of prices, with the nearby future expected to decline more than the deferred contract.

Bear Trap - A false signal which indicates that a rising trend has reversed when in fact it has not.

Bid - An offer to buy at a stated price. Broker - A person who is paid a fee or commission for executing orders. In futures trading, the term may refer to: (1) a floor broker, i.e., an exchange member who executes orders on the trading floor of an exchange; (2) an account executive or associated person who deals with customers for a futures commission merchant or introducing broker; and (3) a futures commission merchant.

Bollinger Bands - Plot trading bands above and below a simple moving average. The standard deviation of closing prices for a period equal to the moving average employed is used to determine the band width. This causes the bands to tighten in quiet markets and loosen in volatile markets. The bands can be used to determine overbought and oversold levels, locate reversal areas, project targets for market moves, and determine appropriate stop levels. The bands are used in conjunction with indicators such as RSI, and MACD histograms. Divergence between Bollinger Bands and other indicators show potential action points. As a general guideline, look for selling opportunities when the price activity is in the upper band and buying opportunities when the prices are in the lower band.

Box Spread - Option arbitrage in which a profitable position is established with no risk. One spread is established with call options, while the other spread is established with put options.

Broker - Someone who executes transactions on an agency basis for a commission or fee.

Buffer Stocks - Stocks available for use to reduce price fluctuations.

Bull - One who expects a rise in prices. The opposite of a "bear".

Bull Flag - See Flag Formations.

Bull Market - A market in which prices are rising.

Bull Spread - Long the nearby future and short the deferred in anticipation of an increase in the general level of prices, with the nearby future expected to increase more than the deferred contract.

Bull Trap - A false signal generated which indicates that the price of a commodity has reversed to an upward trend but proves to be false.

Buy On Close - To buy at the end of a trading session at a price within the closing range.

Buy On Opening - To buy at the beginning of a trading session at a price within the opening range.

Buying Hedge (or Long Hedge) - Hedging transaction in which futures contracts are bought to protect a short cash market position against possible increases in the prices of commodities, securities, indexes or currencies.

Cabinet Trade (Cab) - A trade that allows options traders to liquidate deep out-of-the-money options by trading the option at a price equal to one-half tick.

Calendar Combination - An option strategy where a trader opens a call calendar spread and a put calendar spread at the same time. The strike price of the call is higher than the put strike price.

Calendar Spread - An option strategy where a trader sells a shorter term option and buys a longer term option, with both options having the same strike price.

Call Option - An option that gives the buyer (holder) the right, but not the obligation, to purchase a specific asset or obtain a long futures position at a fixed price within a specified period of time.

Candlestick Charts - A charting method originally developed in Japan. The high and low are described as shadows and plotted as a single vertical line. The price range between the open and close is plotted as a rectangle on the line. If the close is above the open, the body of the rectangle is white. If the close of the day is below the open, the body of the rectangle is black. If the opening and closing prices are the same, there is no rectangle, just a line.

Carrying Charges - Cost to inventory a physical commodity or financial instrument over a period of time. Includes insurance, storage and interest on the invested funds as well as other incidental costs.

Cash Forward Contract -A legal agreement to deliver a fixed quantity and quality of a commodity, at a specified price to a designated location. This removes all price risk.

Cash Commodity - The physical or actual commodity as distinguished from the futures contract. Sometimes called the spot commodity or actuals.

Cash Price - The price for actual or spot commodities available via customary marketing channels.

Cash Settlement - A method of settling certain futures or option contracts whereby the seller (or short) pays the buyer (or long) the cash value of the commodity traded according to a procedure specified in the contract.

Certificated or Certified Stocks - Stocks of a commodity that have been inspected and found to be of a quality deliverable against a futures contract, stored at the delivery points designated as acceptable for delivery by the futures exchange. CFTC - See Commodity Futures Trading Commission.

Channel - Trend lines drawn on a chart from the highs and from the lows are nearly parallel. This channel may be ascending or descending. Prices in a channel formation tend to remain within the channel. A channel breakout is often followed by a move that is roughly the width of the channel, creating a "doubling" of the channel.

Chart Gaps - A gap occurs when the market dips or rallies so fast there is no trade within a price range. Generally, such events occur when a new piece of unexpected information shocks the market. The market typically comes back and tries to "fill" the gap in the following days.

Charting - The use of graphs and charts in the technical analysis of futures markets to plot trends of price movements, average movements of prices, volume and open interest.

Chicago Board of Trade (CBT) - A government licensed futures exchange that provides grain and oilseed futures contracts (as well as financial futures) for its members to trade. The CBT is the oldest futures exchange in the world, being active since the 1850s.

Chicago Mercantile Exchange (CME) - A government licensed futures exchange that provides livestock, financial and dairy futures contracts for its members to trade. The CME has been around since the late 1900s when it was known as the Chicago Butter and Egg Exchange.

Clearing - The procedure through which the clearinghouse becomes the buyer to each seller of a futures contract and the seller to each buyer and assumes responsibility for the financial integrity of each open contract.

Clearing House - An adjunct to a futures exchange through which transactions executed on the floor of the exchange are matched, settled and guaranteed. Charged with assuring the adequate financial protection of trading through collection and payment of margin and the proper conduct of the exchange's delivery procedures.

Clearing Member - A member of a clearinghouse through whom all trades must be settled.

Close - The period at the end of the trading session. Sometimes used to refer to the closing range.

Closing Range (Range) - The high and low prices, or bids and offers, recorded during the period designated as the official close. (See also Settlement Price).

Coffee, Sugar, and Cocoa Exchange (CSCE) - A government licensed futures exchange located in New York, NY, that provides coffee, sugar, cocoa, and dairy futures contracts for its members to trade.

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

Commission - (1) The charge made by a futures commission merchant or introducing broker for handling futures and options orders; (2) the Commodity Futures Trading Commission.

Commodity Channel Index (CCI) - Developed in the early 1980's as a method of trend reversals. The trend is said to reverse when the CCI switches from negative (-) to positive (+) or vice versa. Also the CCI is commonly used as an overbought/oversold indicator when it reaches extreme levels. In many markets, a +200 or -200 signals a coming reversal.

Commodity Futures Trading Commission (CFTC) - The federal regulatory agency established in 1975 to administer the Commodity Exchange Act.

Commodity Pool - An enterprise in which funds contributed by a number of persons are combined for the purpose of trading futures or options on futures.

Commodity Pool Operator (CPO) - An individual or firm, required to be registered under the Commodity Exchange Act, who solicits funds, securities or property for a commodity pool.

Commodity Trading Advisor (CTA) - An individual or firm who, for pay, trades accounts for individual clients or for commodity pools and/or who provides analysis, reports or advice concerning futures and options trading.

Confirmation - At least two indicators or indexes confirm a market turn or trend.

Congestion Areas - Periods of consolidation that fail to show signs of an increasing or decreasing market. Often a large number of days is involved as the market pauses, takes stock of the prevailing and ever-changing base of information, and builds a consensus on the direction in which to move. The top of the congestion area in an upward trending market can be treated as a resistance plane. In a down market, the bottom constitutes a support plane. When the planes are "taken out" via a close above the resistance plane or below the support plane, the correct management action parallels the discussion on resistance and support planes. Once a move out of the congestion area is recorded, price often moves quickly up or down.

Contango - Market situation in which prices are progressively higher in the succeeding delivery months than in the nearest delivery month. Also termed carrying charge; opposite of backwardation.

Contract - Unit of trading for a financial or commodity future. Also, actual bilateral agreement between the parties (buyer and seller) of a futures or options transaction as defined by an exchange.

Contract Grades - Grades and standards specified in the rules of an exchange, which must be met to deliver against the futures contract. These apply to grain futures and in many instances grain meeting different grades and/or quality standards can be delivered at a premium or a discount.

Contract Month - The month for which futures contracts may be satisfied by making or accepting delivery. (See also Delivery Month).

Contrary Opinion - A technical strategy which trades against prevailing market opinion. It assumes that the psychology of traders often exaggerates the incorporation of market news into the market.

Crop Year - See Marketing Year

Corrections - The futures market tends to move in "cycles". Generally, the market reacts – and perhaps over-reacts – and then "corrects" over at least part of the preceding price move. The tendency for the market to correct itself is reliable, and the markets tend to approach 38%, 50%, or 62% corrections. Which level might be approximated will depend on the strength of the major move that is developing.

Cover - (1) To offset an existing futures position; (2) to have in hand the physical commodity or other asset underlying a futures contract when a short futures position is taken; or (3) to acquire the commodity to be delivered on a short futures position.

Covered Call Writing - To grant, or write, a call option while holding or having a long position in the underlying security, commodity, currency, index or futures contract.

Cross-Hedge - Hedging a cash market risk in a futures or options contract for a different but price-related commodity, security, currency or index.

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.

Cup and Handle - A pattern on bar charts. The pattern can be as short as seven weeks and as long as 65 weeks. The cup is in the shape of a U, and the handle has a slight downward drift. The right hand side of the pattern has low trading volume.

Cycle - A theory that prices move in repetitive sequences that are not random. These are driven by human psychology, and also by natural phenomena such as crop production seasons and weather. Well designed and tested cycles can project the timing or pricing of the next major market turn. Cycles are best used with confirming indicators, as a certain amount of variance is expected.

Daily Range - The difference between the high and low price during one trading day.

Day Order - Instructions which a trader gives a broker that will expire at the end of the day if they are not executed.

Day Trader - A futures trader who initiates and closes his/her position on the same day.

Day-Trading - Establishing a futures or options position and offsetting it the same day.

Deferred Futures - The futures delivery months, of those currently trading, that expire farthest in the future; also called forward months.

Deferred Pricing Contract - A cash market contract whereby the buyer and seller agree to exchange a commodity at a specific date in the future and a price will be established at some point prior to delivery.

Delivery - The tender and receipt of an actual commodity or financial instrument, or cash in settlement of a futures contract.

Delivery Month - The specified month within which a futures contract matures and can be settled by delivery.

Delta - The amount of change of an option's price or theoretical value for a unit change in the price of the underlying security, commodity, currency, index or futures contract.

Diagonal Spread - An option strategy in which the purchased options have longer maturity than the written options. The purchased options also have different strike prices.

Discount - (1) The amount a price would be reduced to purchase a commodity of lesser grade; (2) price differences between futures of different delivery months; (3) cash prices below the futures price.

Discretionary Account - An arrangement by which the holder of a futures or futures options account gives written power of attorney to someone else, often the broker, to buy and sell futures and/or futures options without the holder's prior approval.

Double Bottom/Double Top - A decline or advance twice to the same level (plus or minus 3%). It indicates support or resistance at that level and is a reversal pattern.

Drawdown - The reduction in account equity from a trade or a series of trades.

Dual Trader - An exchange member who trades for his or her own account as well as executes customer orders.

EFP - An exchange of futures for physicals, which is a transaction in which one party buys the physical commodity and simultaneously sells futures and the other party does the opposite-sells the physical commodity and simultaneously obtains a long futures position.

Early Exercise - The exercise or assignment of an option prior to expiration.

Elliott Wave Theory - A technical trading technique which assumes that prices move in a five-wave sequence with the direction of the main trend, and in a three-wave sequence during the corrective movements against the main trend.

Equity - The residual dollar value of a futures or options account if it were liquidated at current prices. European option - An option that can be exercised only at the options expiration date.

European Option - An option which may be exercised only at expiration.

Exercise - To take advantage of the right conferred on an option's buyer to buy or sell the item underlying the option at the option's strike (exercise) price.

Exercise Price - The price at which the buyer of a call can purchase the underlying commodity, security, index, currency or futures contract during the life of the option or the price at which the buyer of a put can sell the underlying commodity, security, index, currency or futures contract during the life of the option. Also termed strike price.

Expiration Date - The last day that an option may be exercised into the underlying futures contract. Also, the last day of trading for a futures contract.

Exponential Moving Average - A moving average where the previous average is multiplied by (N-1) days, and then today’s data is added, with the result divided again. Due to the continuous smoothing, exponential moving averages retain some portion of the price action outside the period of the exponential moving average. Simple moving averages, on the other hand, don’t because any move beyond the length of the average is dropped before the average is calculated.

Export Inspections - A weekly report issued by USDA stating the amount of grain and oilseed products that have been inspected for exports from US ports to foreign destinations.

Fill or Kill Order - A trading order which demands immediate execution otherwise it is automatically canceled.

First Notice Day - The first day a buyer of a futures contract can be called upon to take delivery.

Flag Formations - "Resting places" or periods of consolidation after the market has moved for several days. The bear flag occurs in a major downtrend and a bull flag occurs in a major uptrend.

Floor Broker - A person, registered with the National Futures Association, who buys and sells futures contracts for others on the exchange trading floor.

Floor Trader - An exchange member, sometimes called a "local," who executes trades for his or her own account in the futures pit or ring. Floor traders must be registered with the National Futures Association.

Forward Contract - A cash market contract which sets the terms and conditions of exchanging a commodity, whereby the buyer and seller agree upon the price when the contract is initiated. The contract is settled by delivery.

Forward Market - Non-exchange trading of commodities or other assets to be delivered at a future date. Contracts for forward delivery are "tailored", i.e., delivery time, location and amount are determined between each seller and buyer and generally involve marketing, merchandising and delivery.

Fundamentals - A term which refers to basic economic (actual or anticipated supply and demand) factors determining the price of a futures contract.

Fundamental Analysis - Analysis which utilizes supply and demand variables to predict a market price.

Futures - A term used to designate all contracts covering the purchase and sale of financial instruments or physical commodities for future delivery on a commodity futures exchange.

Futures Commission Merchant (FCM) - Individuals, associations, partnerships, corporations and trusts that solicit or accept orders for the purchase or sale of futures and options on futures and that accept payment from or extend credit to those whose orders are accepted. FCMs must be registered with the National Futures Association. Give-up - (1) A trade that is directed to a floor broker by an exchange member FCM (executing firm) and, after the trade is executed, it is given to another firm to clear (clearing firm); (2) a trade in which a customer contacts a floor broker directly, and after execution of the customer's order the floor broker gives up the name of the clearing member who will clear the trade.

Futures Contract - A contract, traded on a futures exchange, for the delivery of a specified commodity. The contract specifies the terms and conditions of delivery, but can be offset prior to delivery by taking an opposition position.

Gaps - See Chart Gaps

Gamma - Measurement of the amount the delta changes for a one point move in the underlying commodity. It is an options term.

Good Till Canceled Order - Instructions which a trader gives a broker, that remain in effect until the order is either executed or canceled.

Head & Shoulders Pattern - One of the more common and reliable patterns. The head and shoulders top is comprised of a rally which ends a fairly extensive advance. It is followed by a correction on less volume. This is the left shoulder. The head is comprised of a rally up on high volume exceeding the top price of the previous rally. The head is completed by a retraction down to the preceding bottom (+/- a couple percent) on light volume. The right shoulder is formed by a rally up which fails to exceed the height of the head. It is then followed by a retraction down. This last reaction down should break a horizontal line drawn along the bottoms of the previous lows from the left shoulder and head. That line is known as the neckline. This is the point in which a major decline begins. It is NOT a Head and Shoulders until that neckline is decisively broken. This can also be inverted and is a reversal pattern.

Hedge - The purchase or sale of a futures contract as a temporary substitute for a cash transaction to be made at a later date. Usually it involves opposite positions in the cash market and futures market at the same time. (See also Long Hedge, Short Hedge).

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

Hedge Ratio - The number of futures contracts needed to hedge a cash market position.

Holder - One who purchases an option.

In-The-Money - A call option with a strike price lower, or a put option with a strike price higher, than the current market price of the underlying asset or futures contract.

Initial Margin - Customers' funds put up as security to guarantee contract fulfillment at the time a futures or options position is established. Intrinsic value - For a call option, the excess of the current market price of the asset or futures contract underlying the option over the strike price of the option; for a put option, the excess of the strike price over the current market price of the asset or futures contract underlying the option.

Initial Performance Bond - The funds required when a futures position (or a short options on futures position) is opened. Also known as the Initial Margin.

Intermarket Spread - A spread using futures contracts in one market spread against contracts in another market. An example would be Kansas City Wheat against Chicago Wheat.

Inside Day - A day in which the total range of price is within the range of the previous day’s price range.

Intrinsic Value - For a put option, the strike price minus the price of the underlying futures contract, if positive; otherwise, the intrinsic value is zero. For a call option, the price of the underlying futures contract minus the strike price, if positive; otherwise, the intrinsic value is zero.

Introducing Broker - Any person, other than someone registered as an associated person of a futures commission merchant, who solicits or accepts futures and related options orders but does not accept money from customers.

Inverted Market - A futures market in which the nearer months are selling at prices higher than the more distant month; characteristic of markets in which supplies are currently in shortage or the yield on the underlying asset exceeds the cost of carrying that asset. Also termed backwardation.

Island Reversal - Created when the market "gaps" up, trades for a few days, and then "gaps" down later. A reliable formation, but there is no basis for projecting the emerging price move.

Kansas City Board of Trade (KCBT) - A government licensed futures exchange that provides wheat, stock index, western natural gas futures, and Internet stock index futures contracts. The KCBT has been around since the mid 1800s.

Key Reversal - A key reversal top has two stipulations. First, the high price for the trading day must be higher than the previous day's high price and the low price must be lower than the previous day's low. This is known as the outside-day because the trading range for the day was wider than the previous day's range. The second condition is that the close for the day be lower than the previous day's close.

Life Of Contract - The period of time from the first to the last trading day for a particular futures contract.

Limit Move - A price that has advanced or declined the permissible amount during one trading session, as fixed by the rules of an exchange.

Limit Order - An order given to a broker by a customer that specifies a price; the order can be executed only if the market reaches or betters that price.

Limit Price - See Maximum Price Fluctuation.

Liquidation - (1) Offsetting or closing out a futures position; (2) a market in which open interest is declining.

Liquidity - A market in which selling and buying can be accomplished with minimal price change.

Local - A futures trader in the pit of a commodity exchange who buys and sells for his/her own account.

Long - (1) One who has bought a futures or options contract to establish a market position; (2) a market position that obligates the holder to take delivery; (3) one who owns an inventory of commodities or securities.

Long Hedge - The purchase of a futures contract in anticipation of an actual purchase in the cash market. Used by processors or exporters as protection against an advance in the cash price. (See also Hedge, Short Hedge).

Maintenance Performance Bond - Also known as Maintenance Margin. A sum, usually smaller than - - but part of - - the initial performance bond, which must be maintained on deposit in the customer’s account at all times. If a customer’s equity in any futures position drops to, or under, the maintenance performance bond level, a "performance bond call" is issued for the amount of money required to restore the customer’s equity in the account to the initial margin level.

Margin (Futures) - The amount of money or collateral deposited by a client with a broker, or by a clearing member with the clearinghouse, as required by the exchange and/or clearinghouse for open futures positions. Initial margin is the total amount of margin per contract required by the broker when a futures position is opened by a customer; maintenance margin is the minimum amount of money per contract that must be maintained on deposit at all times the position is open.

Margin Call - (1) A request from a brokerage firm to a customer to bring margin deposits back to initial levels, normally because of losses resulting from an adverse price move; (2) a request by a clearing house to a clearing member to make payments to or increase deposits at the clearinghouse.

Market-If-Touched (M.I.T.) - A price order that automatically becomes a market order if the price is reached.

Mark-To-Market - The daily adjustment of margin accounts to reflect profits and losses.

Market Order - An order for immediate execution given to a broker to buy or sell at the best obtainable price.

Market Not Held Order - A market order where the investor is giving the floor trader the discretion to execute the order when he/she feels it is best. If the floor trader feels that the market will decline, he/she may hold the order to try to get a better price. This order may not get filled.

Market If Touched - An order with the floor broker which becomes a market order if a given price is reached.

Marketing Year - The marketing and production year for individual commodities designated by the USDA. For corn and soybeans, the marketing year begins September 1 and ends August 31 of the following year. For wheat, it begins June 1 and end on May 31 of the following year. The milk marketing year coincides with the calendar year from January 1 to December 31.

Maturity - The period of time in a futures contract’s life in which the seller can make physical delivery, and the buyer can take physical delivery of the cash grain.

Maximum Price Fluctuation - The maximum amount the contract price can change, up or down, during one trading session, as stipulated by Exchange rules.

Mid-America Commodity Exchange (Mid-AM) - A government licensed futures exchange in Chicago which trades futures contracts on agricultural and financial products which have smaller quantity requirements than the CME and CBT. The Mid-AM is owned by the CBT.

Minneapolis Grain Exchange - A government licensed futures exchange that provides grain futures contracts primarily for grain grown in the Upper Midwest and Pacific Northwest.

Minimum Price Fluctuation - Smallest price change possible in a futures or options contract. Also called the tick value.

Momentum - In technical analysis, the relative change in price over a specific time interval. Often equated with speed or velocity and considered in terms of relative strength.

Moving Average Convergence/Divergence (MACD) - Used to determine overbought or oversold conditions in the market. The MACD line is the difference between the long and short exponential moving averages of the chosen commodity. The signal line is an exponential moving average of the MACD line. Signals are generated by the relationship of the two lines. As with RSI and Stochastics, divergence between the MACD and prices may indicate an upcoming trend reversal.

Moving Averages - A trend-following technical tool which uses moving averages to detect significant changes in the trend of the market.

N

Naked Writing - Selling (writing) an options contract with no opposite cash or futures market position. Also called uncovered writing.

Nearby Futures - The futures contract(s) closest to expiration.

Negative Divergence - When two or more indicators, indexes, or averages show differing trends.

New York Cotton Exchange (NYCE) - A government licensed futures exchange that provides cotton, orange juice, currency, and stock index futures contracts for its members to trade.

Noise - Fluctuations in the market which can confuse one’s interpretations of market direction. Noise includes "outlier" days that can distort technical trading systems.

Notice Day - The day on which a "notice of intention of delivery" can be issued for a specific futures contract.

O

Offer - An indication of willingness to sell at a given price; opposite of bid.

Offset - (1) Liquidating a purchase of futures or options through the sale of an equal number of contracts of the same delivery month, or liquidating a sale of futures or options through the purchase of an equal number of contracts of the same delivery month; (2) matching total long with total short contracts for the purpose of determining a net long or net short position; (3) non-competitively matching one customer's order with another, a practice that is permissible only when executed in accordance with the Commodity Exchange Act, CFTC regulations and rules of the futures exchange.

Omnibus Account - An account carried by one futures commission merchant with another futures commission merchant in which the transactions of two or more accounts are combined and carried in the name of the originating FCM rather than designated separately.

Open Interest - All futures or options contracts that have been entered into and not yet liquidated by an offsetting transaction or by delivery. In general, a price move in futures will not be sustained unless the open interest starts to increase. This is especially true of "bull" or upward trending markets.

Open Order - An order to a broker that is good until it is canceled or executed. See also Good Till Canceled Order.

Opening, The - The period at the beginning of the trading session during which all transactions are considered made or first transactions were completed.

Open Price (Or Range) - The range of prices at which the first bids and offers were made or first transactions were completed.

Option - A contract that gives the buyer the right but not the obligation to buy or sell a futures contract or a specified quantity of a commodity, security, currency or index at a specific price within a specified period of time, regardless of the current market price of the underlying item.

Original Margin - The deposit the clearinghouse requires of clearing members when futures contracts are presented for clearance; parallel to the initial margin required of customers by exchanges and collected by FCMs when futures positions are originated.

Out-Of-The-Money - A call option with a strike price higher or a put option with a strike price lower than the current market price of the underlying commodity, security, currency, index or futures contract.

Out-Trades - A situation that results when there is some confusion or error on a trade. A difference in pricing, with both traders thinking they were buying, for example, is a reason why an Out-Trade may occur.

Overbought - A market condition in which prices have risen too fast or too far, relative to the underlying economic fundamental factors. Traders would expect prices to fall in this type of market, at least in the near term.

Oversold - A market condition in which prices have fallen too fast and too far, relative to the underlying fundamental factors. Traders would expect prices to increase in this type of market, at least in the near term.

P

P&S (Purchase-and-sale) Statement - A statement sent by a brokerage firm to a customer when a futures or options position is offset or extinguished by delivery. A P&S statement typically shows the number of contracts involved, the prices at which and dates on which the contracts were bought and sold, the gross profit or loss, the commission charges, the net profit or loss on the transactions and the account balance.

Parabolic - A time/price system for the automatic setting of stops. The stop is both a function of price and time. The system allows a few days for market reaction after a trade is initiated after which stops begin to move in more rapid incremental daily amounts in the direction the trade was initiated. For example, when a short position is taken the stop will move down regardless of price direction. However, the distance that the stop moves down is determined by the favorable distance the price has moved. If the price fails to move favorably within a certain period of time, the stop reverses the position and begins a new time period.

Performance Bond - Funds that must be deposited as a performance bond by a customer with his/her broker, by a broker with a clearing member, or by a clearing member, with the Clearing House. The performance bond helps to ensure the financial integrity of brokers, clearing members and the Exchange as a whole.

Performance Bond Call - A demand for additional funds because of adverse price movement.

Pit - A specially constructed arena on the trading floor where futures and options trading is conducted.

Point - The minimum price fluctuation allowed for a particular type of futures contract.

Point and Figure Chart - A charting technique which assumes that the only important thing is the direction of price change—volume and time are unimportant. Chart patterns are then observed to determine a trading strategy.

Position - An interest in the market, either long, or short, in the form of open contracts.

Position Limit - The maximum position, either net long or net short, in a futures market, an options market or in a futures and its related options market combined, that may be held or controlled by one person as prescribed by an exchange or the CFTC. Such limits can be set for individual expiration months and for all listed expiration months combined. Because hedgers often are exempt from these limits, they often are termed "speculative limits".

Position Trader -A futures trader who buys or sells contracts and holds them for an extended period of time - as distinguished from a day trader, who normally initiates and offsets futures positions within a single trading session and ends the day "flat".

Premium - (1) The amount a price would be increased to purchase a better quality commodity; (2) a futures delivery month selling at a higher price than another; (3) cash prices that are above the futures; (4) the money an option buyer pays to an option writer for granting an option.

Price Risk - The risk associated with not being able to predict price accurately. Price risk is greater than basis risk.

Put - An option to sell a specified amount of a commodity, security, currency, index or futures contract at an agreed-upon price within a specified period of time.

Put Call Ratio - Ratio showing the put trading volume divided by the call trading volume.

R

Rally - An upward movement of prices following a decline; the opposite of a reaction.

Range - The high and low prices or high an low bids and offers, recorded during a specified time.

Ratio Calendar Combination - Option strategy where a trader has at the same time a ratio calendar spread using calls and a ratio calendar spread using puts. The strike price of the puts are less than the strike prices of the calls.

Ratio Calendar Spread - Option strategy using either puts or calls. One sells more near term options than longer term options are purchased. All options have the same strike price.

Ratio Spread - Option strategy using either puts or calls. The trader purchases a given amount of options and then sells a larger amount of out of the money options.

Reaction - A decline in prices following an advance. The opposite of a rally.

Registered Representative - A person employed by, and soliciting business for, a commission house or Futures Commission Merchant.

Relative Strength Index (RSI) - Widely used measure of momentum in the markets. When the market reaches a level of 70 or higher, it is said to be "overbought" ("oversold" at 30 or less). The producer should be careful buying an overbought market, or selling an oversold market. One approach is to ignore buy and sell signals when the market is at such extremes.

Resistance Planes - A horizontal plane drawn across a past high. The expectation is that the market will falter, unless the fundamental supply-demand balance changes, as it again approaches the plane. Short hedges are placed on a rally toward the plane. The most important resistance plane is the horizontal plane across the life-of-contract high.

Retracements - Price movements against the direction of the current trend or following the end of a trend. The market "retraces its steps", often a percentage of the preceding move. Common retracements are 38, 50, and 62 percent. A rule of thumb is that a retracement of at least 33% is required just to allow the winners from the previous move to buy or sell back their positions.

Rollover - (1) A trading procedure involving the shift of one delivery month of a spread into another month while holding the other delivery month. The shift can take place in either the long or short month. (2) Lifting a futures position that is not part of a spread and simultaneously re-establishing it in a deferred delivery month.

Round Turn - A completed transaction involving both a purchase and a sale.

S

Scalp - Scalping normally involves establishing and liquidating a position quickly, usually within the same day, hour or even just a few minutes.

Scalper - A speculator on the trading floor of an exchange who buys and sells frequently, holding positions for only a short period of time during a trading session. In liquid markets, scalpers stand ready to buy at the minimum price change (tick) below the last transaction price and to sell at a tick above.

Selling Hedge (or Short Hedge) - Selling futures contracts against a long cash market position to protect against a decrease in the price of a commodity, security, currency or index.

Settlement Price - The price at which the clearinghouse each day settles all accounts between clearing members for each open position in each contract month of each futures and options contract. Settlement prices are used to determine both margin calls and invoice prices for deliveries.

Short - (1) The selling side of an open futures contract; (2) a trader whose net position in the futures market shows an excess of open sales over open purchases; (3) selling (granting) an options contract.

Short-Covering - Buying to offset an existing short position.

Short Hedge - The sale of a futures contract in anticipation of a later cash market sale. Used to eliminate or lessen the possible decline in value of ownership of an approximately equal amount of the cash financial instrument or physical commodity. (See also Hedge, Long Hedge).

Speculator - One who attempts to anticipate price changes, and, through buying and selling futures contracts, aims to make profits; does not use the futures market in connection with the production, processing, marketing, or handling of a product. The speculator has no interest in making or taking delivery.

Spot - (1) Market for immediate delivery and payment of the product. (2) Nearest delivery month of a futures contract.

Spot Price (or Cash Price) - The price at which a physical, actual or spot commodity is selling at a given time and place.

Spread - The purchase of one futures or options contract against the sale of another futures or options contract on the same or related commodity, security, currency or index.

Stochastic Oscillator - Evaluates a market’s momentum by determining the relative position of closing prices within the high-low range for N days. It measures the relationship between the close and the high-low range as a percent between 0 and 100. A 70 or higher means the close is in the top of the range, a 30 or lower in the bottom of the range.

Stop And Reverse - A stop order that, when hit, is a signal to close the current position and open an opposite position. A trader holding a long position would sell that position and then go short on the same commodity.

Stop Limit Order - An order which becomes a limit order once the specified price is reached. It is similar to a stop order.

Stop Order (Stop) - An order to buy or sell at the market when and if a specified price is reached. Buy stop orders are placed above the present market price. Sell stop orders are placed below the present market price.

Straddle - An options strategy where the purchase or sale of an equal number of puts and calls is made. The strike price and expiration date is the same for all.

Strangle - An options strategy which involves a combination of a put and a call with different strike prices but the same expiration date.

Strike Price - The price at which the buyer of an option contract may choose to exercise the option.

Support Planes - A horizontal plane drawn across past lows. The expectation is that the market will not drop down through the support plane, unless the fundamental supply-demand balance has changed. Short hedges are lifted on an approach to the plane. The most important support plane is the plane across the life-of-contract lows.

Synthetic Price - A method for determining where the market is trading "synthetically" when futures are locked in a limit move buy options continue to trade. The synthetic price is determined by subtracting the put premium from the call premium for the same strike price, and then adding or subtracting the difference from the strike price.

Technicals - A term which refers to a variety of chart following techniques and chart patterns related to market prices.

Technical Analysis - Analysis of the markets based on past price data, rather than fundamental supply and demand information. It is based on a wide array of tools to give buy and sell signals or to predict market direction. Common technical tools include bar charts, contrary opinions, Elliott Wave theory, moving averages, trend analysis, price strength indexes.

Tick - Minimum price fluctuation of a futures or options contract.

Time Value - The excess, if any, of an option's premium over its intrinsic value.

Trading Volume - See Volume

Trend - The general direction of the market.

Trend Line - (1) the uptrend line is drawn across two lows that are several trading days (preferably 10 or more) apart. (2) the downtrend line is drawn across two highs that are several trading days (preferably 10 or more) apart. The lines should not be significantly steeper than the trends that appear via inspection of the price patterns on the chart. The short hedge is "placed" when we see a close below an uptrend line, and the hedge is "lifted" when we see a close above a downtrend line.

Trending Market - Situation where the price moves in a single direction and it usually closes on an extreme for the day.

Uncovered Option ("Naked" Option) - It is when a trader writes an option without owning the underlying security. It is a position with large risk. An uncovered option acts like an outright futures position if it is going against you.

Underlying Futures Contract - The specific futures contract that may be bought or sold by the exercise of an option.

Variation Margin - Settlement via the clearinghouse of daily or intraday gains and losses between clearing member firms.

Vertical Spread - An options strategy which is also a spread where the options have different strike prices but the same expiration dates. One is bought, and the other is sold.

Volatility - A measure of variability, usually of prices, and a major factor influencing the price of an option. The standard deviation of a price series is commonly used to measure price volatility.

Volume - The number of contracts (either the long or the short side of the market) traded during a specified period of time. It is a measure of intensity in the market. Other things equal, any sell or buy signal is more strongly confirmed when it occurs on high volume.

Williams Percent R - Calculated much like the stochastic oscillator. Measures the position of price in a negative range from 0 to -100. Ignoring the negative sign allows the evaluation of an overbought market (in the 80 to 100 range) or an oversold market (in the 0 to 20 range). Watch for divergence when the price makes a new high and the %R does not as an indication that the market is ready to top.

Writer - The seller or grantor of an option.

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