Terms

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Terms—Futures Language

 

A

 

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

 

Agricultural Commodity An agricultural commodity is defined in Commission regulation 1.3(zz) as a commodity in one of four categories: (1) the enumerated commodities listed in section 1a of the Commodity Exchange Act, including such things as wheat, cotton, corn, the soybean complex, livestock, etc.; (2) a general operational definition that covers: “All other commodities that are, or once were, or are derived from, living organisms, including plant, animal and aquatic life, which are generally fungible, within their respective classes, and are used primarily for human food, shelter, animal feed, or natural fiber;” (3) a catch-all category for commodities that would generally be recognized as agricultural in nature, but which don’t fit within the general operational definition: “Tobacco, products of horticulture, and such other commodities used or consumed by animals or humans as the Commission may by rule, regulation, or order designate after notice and opportunity for hearing;” and (4) “Commodity-based indexes based wholly or principally on underlying agricultural commodities.”

 

At-the-Money When an option’s strike price is the same as the current trading price of the underlying commodity, the option is at-the-money.

 

B

 

Basis To figure basis subtract the futures price when you market your cattle from the cash price. Basis = Cash Price – Futures Price (when you market your cattle)

 

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

 

Basis Point The measurement of a change in the yield of a debt security. One basis point equals 1/100 of one percent.

 

Basis Quote Offer or sale of a cash commodity in terms of the difference above or below a futures price (e.g., 10 cents over December corn).

 

Basis Risk The risk associated with an unexpected widening or narrowing of the basis between the time a hedge position is established and the time that it is lifted.

 

Bear One who expects prices to fall

 

Bear Market A falling market

 

Bear Spread  The simultaneous sale of a nearby futures contract and the purchase of a deferred contract, with the expectation that the nearby contract will lose relative to the deferred

 

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

 

Board of Trade Any organized exchange or other trading facility for the trading of futures and/or option contracts.

 

Break A rapid and sharp price decline.

 

Broker An individual who works for a brokerage firm, who must be licensed by the Commodity Futures Trading Commission (CFTC). You must have a broker to place an order or hedge your livestock with either futures or options.

 

Types of Brokers

1. Discount- A discount broker typically specializes in order execution only. You simply call the broker and place your order. You pay lower commission and receive lower service.

2. Full Service- A full service broker takes time to help understand your situation, will be available for discussion and advice when you call in an order, and may even call you to provide suggestions. They may also send you market information and newsletters. Commission fees vary from broker to broker.

 

Bull One who expects prices to rise

 

Bull Market A rising market

 

Bull Spread The simultaneous purchase of a nearby futures contract and the sale of a deferred contract, with the expectation that the nearby contract will gain relative to the deferred.

 

Buoyant A market in which prices have a tendency to rise easily with a considerable show of strength.

 

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

 

C

 

Call Option An option contract that gives the buyer the right but not the obligation to purchase a commodity or other asset or to enter into a long futures position at a specified price on or prior to a specified expiration date

 

–A call option increases in value as the futures market rises

–Therefore the owner of a call will use it for upside market revenue potential if a forward contract or hedge has already created a floor price.

–It doesn’t create a floor, but can be used to open the ceiling of another price strategy. Calls are also used to protect a buyer against an increase in input cost.

 

Carrying Charges Also called cost of carry. Cost of storing a physical commodity or holding a financial instrument over a period of time. These charges include insurance, storage, and interest on the deposited 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’.

 

Cash Market A marketplace for the physical commodity, such as an auction

 

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

 

Clearing Organization An entity through which futures and other derivative transactions are cleared and settled. It is also charged with assuring the proper conduct of each contract’s delivery procedures and the adequate financing of trading. A clearing organization may be a division of a particular exchange, an adjunct or affiliate thereof, or a freestanding entity. Also called a clearing house, multilateral clearing organization, centralized counterparty, or clearing association. A clearing organization that is registered with the CFTC is known as a Derivatives Clearing Organization.

 

Commission The amount of money you pay the brokerage firm to execute your order on the trading floor of the exchange.

 

Commodity Classes, Agricultural

 

Deliverable versus Cash Settled Commodities

Two classes of agricultural commodities typically referred to in trading agricultural commodities are deliverable and cash settled commodities. Deliverable commodities refer to those commodities that the short position (seller) has the right, but not the obligation, to make delivery to a pre-specified location for which the long position (buyer) has the obligation to take delivery. For instance, corn is a deliverable commodity. A seller (short) could make delivery at one of the specified delivery locations and the buyer (long) would have to take delivery of the corn at that location. Other deliverable commodities include wheat, soybeans, live cattle, and pork bellies. Cash settled commodities are those commodities for which a cash settlement can be made at the end of the trading period. For instance, feeder cattle are a cash traded commodity.

 

 

Commodity Market A physical or virtual marketplace for buying, selling and trading raw or primary products. For investors’ purposes there are currently about 50 major commodity markets worldwide that facilitate investment trade in nearly 100 primary commodities.

 

Contract Grades  A quality definition established by the exchange to represent the standard type of grain or livestock acceptable for delivery against a futures contract. Included in the specification is the premium or discount for delivery of a nonstandard quality or type of grain.

 

Counterparty Risk The risk associated with the financial stability of the party with whom one has entered into contract. Forward contracts impose upon each party the risk that the counterparty will default, but futures contracts executed on a designated contract market are guaranteed against default by the clearing organization.

 

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

 

D

 

Daily Price Limit The maximum price advance or decline from the previous day’s settlement  permitted during one trading session, as fixed by the rules of an exchange.

 

Delivery The tender and receipt of the actual commodity, the cash value of the commodity, or of a delivery instrument covering the commodity (e.g., warehouse receipts or shipping certificates), used to settle a futures contract.

 

Delivery Date The date on which the commodity or instrument of delivery must be delivered to fulfill the terms of a contract.

 

Delivery Month The specified month within which a futures contract matures and can be settled by delivery or the specified month in which the delivery period begins.

 

Delivery Instrument A document used to effect delivery on a futures contract, such as a warehouse receipt or shipping certificate.

 

Delivery Point A location designated by a commodity exchange where stocks of a commodity represented by a futures contract may be delivered in fulfillment of the contract. Also called location.

 

E

 

Enumerated Agricultural Commodities The commodities specifically listed in Section 1a(9) of the Commodity Exchange Act: wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen concentrated orange juice.

 

Equity As used on a trading account statement, refers to the residual dollar value of a futures or option trading account, assuming it was liquidated at current prices.

 

Exchange A central marketplace such as a designated contract market with established rules and regulations where buyers and sellers meet to trade futures and options contracts or securities.

 

Exercise An Option Action taken by the buyer of an option who wants to have a futures position. Only the buyer has the right to exercise the option (the seller is obligated to take an opposite, possibly adverse, futures position than the buyer and for this risk receives the premium). Exercising your option means that (if you have a call) you want to buy the commodity at the strike price; or (if you have a put) sell the commodity at the strike price

 

Exercise Price (Strike Price) The price, specified in the option contract, at which the underlying futures contract, security, or commodity will move from seller to buyer.

 

F

 

Feed Ratio The relationship of the cost of feed, expressed as a ratio to the sale price of animals, such as the corn-hog ratio. These serve as indicators of the profit margin or lack of profit in feeding animals to market weight.

 

Final Settlement Price The price at which a cash-settled futures contract is settled at maturity, pursuant to a procedure specified by the exchange.

 

Forward contract. An agreement between two parties calling for delivery of, and payment for, a specified quality and quantity of a commodity at a specified future date. The price may be agreed upon in advance, or determined by formula at the time of delivery or other point in time.

 

Forward Months Futures contracts currently trading, calling for later or distant delivery.

 

Forward pricing Agreeing on a price or a pricing formula for later delivery. Forward pricing is used broadly here to refer to both hedging with futures or options, and forward contracting.

 

Fundamental Analysis The analysis of market supply and demand conditions for a commodity.

 

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.

 

G

 

Good This Week Order (GTW) Order which is valid only for the week in which it is placed.

 

Good Till Canceled Order (GTC) An order which is valid until cancelled by the customer. Unless specified GTC, unfilled orders expire at the end of the trading day. See Open Order.

 

Grades Various qualities of a commodity.

 

Grading Certificates A formal document setting forth the quality of a commodity as determined by authorized inspectors or graders.

 

Grain Futures Act Federal statute that provided for the regulation of trading in grain futures, effective June 22, 1923; administered by the Grain Futures Administration, an agency of the U.S. Department of Agriculture. The Grain Futures Act was amended in 1936 by the Commodity Exchange Act and the Grain Futures Administration became the Commodity Exchange Administration, later the Commodity Exchange Authority.

 

H

 

Head and Shoulders In technical analysis, a chart formation that resembles a human head and shoulders and is generally considered to be predictive of a price reversal. A head and shoulders top (which is considered predictive of a price decline) consists of a high price, a decline to a support level, a rally to a higher price than the previous high price, a second decline to the support level, and a weaker rally to about the level of the first high price. The reverse (upside-down) formation is called a head and shoulders bottom (which is considered predictive of a price rally).

 

Hedge Exemption An exemption from speculative position limits for bona fide hedgers and certain other persons who meet the requirements of exchange and CFTC rules.

 

Hedge Fund A private investment fund or pool that trades and invests in various assets such as securities, commodities, currency, and derivatives on behalf of its clients, typically wealthy individuals. Some commodity pool operators operate hedge funds.

 

Hedge Funding If you plan to take futures positions in the market, you need to decide how you’ll fund them

 

–Some producers establish a specific hedging line of credit with their lender to cover margin requirements

•in this case a security agreement and hedge assignment with the lender will need to be signed - your broker may also have to sign

•if you opt for this approach make sure your lender is comfortable with it and that they understand the fundamentals of hedging and are willing to finance margin and margin calls

 

However, with Nexus Ag Marketing, we fund a margin and margin call account for our producers. It’s a major advantage of our hedging program, and specifically The Freedom Hedge, our flagship cattle pricing mechanism.

 

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

 

Historical Volatility A statistical measure of the volatility (specifically, the annualized standard deviation) of a futures contract, security, or other instrument over a specified number of past trading days.

 

I

 

Implied Volatility The volatility of a futures contract, security, or other instrument as implied by the prices of an option on that instrument, calculated using an options pricing model.

 

In-the-Money A put option is said to be in the money when the strike price of the put is above the current price of the underlying commodity. It is “in the money” because the holder of this put has the right to sell the stock above its current market price. A call option is said to be in the money when the current market price of the commodity is above the strike price of the call. It is “in the money” because the holder of the call has the right to buy the commodity below its current market price.

 

Initial Margin Customers’ funds put up as security for a guarantee of contract fulfillment at the time a futures market position is established.

 

Instrument A tradable asset such as a commodity, security, or derivative, or an index or value that underlies a derivative or could underlie a derivative.

 

Intrinsic Value A measure of the value of an option or a warrant if immediately exercised, that is, the extent to which it is in-the-money. 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.

 

Invisible Supply Uncounted stocks of a commodity in the hands of wholesalers, manufacturers, and producers that cannot be identified accurately; stocks outside commercial channels but theoretically available to the market. See Visible Supply.

 

 

J K

 

L

 

Leverage The use of borrowed funds to help finance a farm business. Higher levels of debt, relative to net worth, are generally considered riskier.

 

Liquidity. The extent to which assets can be quickly converted to cash without accepting a discount in their value. An asset is perfectly liquid if its sale generates cash equal to, or greater than, the reduction in the value of a farm due to the sale (i.e., the farm’s equity is not affected by the sale). Illiquid assets, in contrast, cannot be quickly sold without a producer accepting a discount, reducing the value of the farm by more than the expected sale price.

 

Limit Order An order to buy or sell a futures contract at a specific price, or at a price that is more favorable than the price specified

 

Life of Contract Period between the beginning of trading in a particular futures contract and the expiration of trading. In some cases, this phrase denotes the period already passed in which trading has already occurred. For example, ‘The life-of-contract high so far is $2.50.’ Same as life of delivery or life of the future.

 

Limit (Up or Down) The maximum price advance or decline from the previous day’s settlement price permitted during one trading session, as fixed by the rules of an exchange. In some futures contracts, the limit may be expanded or removed during a trading session a specified period of time after the contract is locked limit. See Daily Price Limit.

 

Liquidity The extent to which assets can be quickly converted to cash without accepting a discount in their value. An asset is perfectly liquid if its sale generates cash equal to, or greater than, the reduction in the value of a farm due to the sale (i.e., the farm’s equity is not affected by the sale). Illiquid assets, in contrast, cannot be quickly sold without a producer accepting a discount, reducing the value of the farm by more than the expected sale price.

 

Locked-In A hedged position that cannot be lifted without offsetting both sides of the hedge (spread). Also refers to being caught in a limit price move.

 

Long A buyer of a futures contract. Someone who buys a futures contract is often referred to as being long that particular contract.

 

Long Hedge Balancing a “short cash” position (unmet need) with a long futures position

 

Long Position Inventory of product or a purchased futures contract The long futures position is also used when a manufacturer wishes to lock in the price of a raw material required sometime in the future.

 

Lot A unit of trading.

 

M

 

Margin Deposit performance bond (margin) Before you open an account to trade futures or options on futures, you must deposit a performance bond or margin — either a cash deposit or another form of collateral — with your broker. Futures exchanges establish minimum initial and maintenance margin levels for all products traded at the Exchange; your broker’s requirements may be higher. (Buyers of options pay the full price of the option and are not subject to performance bond/margin requirements.)

 

Margin Call A request from a brokerage firm to a customer to bring margin deposits up to initial levels; (2) a request by the clearing organization to a clearing member to make a deposit of original margin, or a daily or intra-day variation margin payment because of adverse price movement, based on positions carried by the clearing member.

 

Marketing Plan A written plan for each commodity produced. It specifies production costs, price goals, potential price outlook, production and price risk and a strategy for marketing the commodity.

 

Market Order An order to buy or sell a futures contract at the best available price. A market order is executed by the broker immediately.

 

Marking to Market At the end of each trading day and all following days that your position remains open, the contract value is “marked-to-market,” meaning your account is credited or debited based on that session’s gains or losses.

This system gives futures trading a solid credit standing because losses are not allowed to accumulate.

 

If your account falls below the maintenance level (a set minimum performance bond/margin per outstanding futures trade), your broker will contact you for additional funds (often referred to as a ‘margin call’) to replenish it to its initial level. If your position generates a gain, you may be able to withdraw excess funds from your account.

 

Maturity

Period within which a futures contract can be settled by delivery of the actual commodity.

 

N

 

Naked Option The sale of a call or put option without holding an equal and opposite position in the underlying instrument. Also referred to as an uncovered option, naked call, or naked put.

 

Nearby Delivery Month The month of the futures contract closest to maturity; the front month or lead month.

 

Notice of Intent to Deliver A notice that must be presented by the seller of a futures contract to the clearing organization prior to delivery. The clearing organization then assigns the notice and subsequent delivery instrument to a buyer. Also notice of delivery.

 

O

 

Offset Liquidating a purchase of futures contracts through the sale of an equal number of contracts of the same delivery month, or liquidating a short sale of futures through the purchase of an equal number of contracts of the same delivery month.

 

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

 

Option Expiration Date The last day that an option may be exercised or offset. Exercising a put would mean you could sell or take a short position in the futures market. Exercising a call would mean you could buy or take a long position in the futures market. (See also exercise an option glossary entry.) You must know the expiration date so you can manage your price risk management accordingly.

 

Out-of-the-Money A call option is said to be out of the money if the current price of the underlying stock is below the strike price of the option. A put option is said to be out of the money if the current price of the underlying stock is above the strike price of the option.

 

P

 

Physical Commodity A tangible commodity rather than a financial commodity, typically an agricultural commodity, energy commodity or a metal.

 

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

 

Put Option  An option contract that gives the holder the right but not the obligation to sell a specified quantity of a particular commodity, security, or other asset or to enter into a short futures position at a given price (the strike price) prior to or on or prior to a specified expiration date. A put option increases in value as the futures market falls. The owner of a Put will use the option as protection against a significant price decline in the market. There is no price ceiling or top side restriction.

 

Premium In futures options, the market-determined price of an option. The premium of an option at a specific strike price is determined by the buyers’ willingness to pay it and sellers willingness to sell it. It is affected by the strike price in relation to the futures price level, the time remaining until expiration and market volatility.

 

Price Discovery The process of establishing a market price at which demand and supply for an item are matched. By bringing buyers and sellers together and making the process transparent, financial markets facilitate price discovery.

 

Q

 

Quotation

The actual price or the bid or ask price of either cash commodities or futures contracts.

 

 

R

 

Rally An upward movement of prices.

 

Reaction A downward price movement after a price advance.

 

Resistance In technical analysis, a price area where new selling will emerge to dampen a continued rise.

 

Risk Uncertainty about outcomes that are not equally desirable. Risk may involve the probability of making (or losing) money, harm to human health, negative effects on resources (such as credit), or other types of events that affect welfare.

 

Reversal A change of direction in prices.

 

Reverse Conversion or Reversal With regard to options, a position created by buying a call option, selling a put option, and selling the underlying instrument (for example, a futures contract). See Conversion. Reverse Crush Spread: The sale of soybean futures and the simultaneous purchase of soybean oil and meal futures. SeeCrush Spread.

 

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

 

S

 

Selling Hedge (or Short Hedge) Selling futures contracts to protect against possible decreased prices of commodities. See Hedging.

 

Short A seller of a futures contract. Someone who sells a futures contract is often referred to as being short that particular contract.

 

Short Hedge Balancing a “long cash” position (inventory) with a short futures position

 

Short Position Unmet requirement for product or a sold futures contract. The short futures position is used by a producer to lock in a price of a commodity that he or she is going to sell in the future.

 

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

 

Speculation The attempt to anticipate commodity price changes and to profit through the purchase or sale of either the commodity futures contract or the physical commodity

 

Speculator A non-hedging trader, one who assumes risk positions with the hope of making a profit rather than hedging future cash purchases or sales.

 

Spread The difference between the price of two futures contract months. It also refers to the simultaneous purchase and sale of the same or related commodities, with the expectation that the price differential will result in a profit.

 

Spot Commodity (1) The actual commodity as distinguished from a futures contract; (2) sometimes used to refer to cash commodities available for immediate delivery. See Actuals or Cash Commodity.

 

Spot Month The futures contract that matures and becomes deliverable during the present month. Also called Current Delivery Month.

 

Spot Price The price at which a physical commodity for immediate delivery is selling at a given time and place. See Cash Price.

 

Stop Order An order which becomes a market order if the market reaches a specified price. A stop order to buy a futures contract would be placed with the stop price set above the current futures price. Conversely, a stop order to sell a futures contract would be placed with the stop price set below the current futures price.

 

Strike Price Also known as the exercise price, is the price at which the option holder - the buyer - may buy or sell the underlying futures contract. Exercising the option results in a futures position at the designated strike price. Strike prices are set by the Exchange at $1.00 to $2.00/cwt. intervals for livestock and .25 cent intervals for milk.

 

Systematic Risk Market risk due to factors that cannot be eliminated by diversification.

 

Systemic Risk The risk that a default by one market participant will have repercussions on other participants due to the interlocking nature of financial markets. For example, Customer A’s default in X market may affect Intermediary B’s ability to fulfill its obligations in Markets X, Y, and Z.

 

T

 

Technical Analysis An analysis of the market based on technical aspects such as price chart formation, volume and open interest.

 

Technical Correction A price change against the trend. It is caused by such considerations as chart formations, volume, open interest, or delivery conditions, rather than by fundamental, supply or demand, reasons.

 

Time Decay The tendency of an option to decline in value as the expiration date approaches, especially if the price of the underlying instrument is exhibiting low volatility. See Time Value.

 

Time Spread The selling of a nearby option and buying of a more deferred option with the same strike price. Also called Horizontal Spread.

 

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.

 

Transaction The entry or liquidation of a trade.

 

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

 

U

 

Uncovered Option See Naked Option.

 

Underlying Commodity The cash commodity underlying a futures contract. Also, the commodity or futures contract on which a commodity option is based, and which must be accepted or delivered if the option is exercised.

 

Underlying Futures Contract The corresponding futures contract that may be purchased or sold upon exercising the option.  Example - a June option on a commodity gives you the right to buy or sell a June futures contract for that commodity.

 

V

 

Visible Supply Usually refers to supplies of a commodity in licensed warehouses. Often includes floats and all other supplies ‘in sight’ in producing areas. See Invisible Supply.

 

Volatility A statistical measurement (the annualized standard deviation of returns) of the rate of price change of a futures contract, security, or other instrument underlying an option. See Historical Volatility, Implied Volatility.

 

Volume The number of contracts traded during a specified period of time. It is most commonly quoted as the number of contracts traded, but for some physical commodities may be quoted or as the total of physical units, such as bales, or bushels, pounds or dozens or barrels.

 

W

 

Writer The issuer, grantor, or seller of an option contract.

 

XYZ