Glossary of Futures Related Terms
Futures Glossary
Order Types
Option Spreads
Synthetic Positions
Exchanges
Months
This glossary is intended to assist customers in understanding specialized terms used in the futures and securities industries. It is not inclusive and is not intended to state or suggest a legal significance or meaning of any word or term.
Arbitrage
Taking an economically opposite position in a security futures contract on another exchange, in an options position, or in an underlying security.
Broad-based Security Index
A security index that does not fall under the definition if a narrow-based security index (see narrow-based security index.) A future on a broad based security index is not a security future. The risk disclosure statement applies solely to security futures and generally does not pertain to futures on a broad-based security index. Futures on a broad-based security index are under exclusive jurisdiction of the C.F.T.C.
Cash Settlement
A method of settling certain futures contracts by having the buyer (or long) pay the seller (or short) the cash value of the contract according to a procedure set by the exchanges.
Clearing Broker
A member of the clearing organization for the contract being traded. All trades, and the daily profits or losses form those trades, must go through a clearing broker.
Clearing Organization
A regulated entity that is responsible for settling trades, collecting losses, and distributing gains and handling deliveries.
Contract
1) The unit of trading for a particular futures contract (e.g., one contract may be 100 shares of an underlying security) 2) the type of futures being traded (e.g., futures on ABC stock).
Contract Month
The last month in which delivery is made against the futures contract or the contract is cash settled. Sometimes referred to as the delivery month.
Day Trading Strategy
An overall trading strategy characterized by the regular transmission by a customer of intra-day orders to effect both purchase and sale transactions in the same security or securities.
EDGAR
The SEC's Electronic Data Gathering, Analysis and Retrieval system maintains electronic copies of corporate information filled with the agency. EDGAR submissions can be accessed through the SEC's website www.SEC.gov.
Futures Contract
A futures contract is
1) an agreement to purchase or sell a commodity for delivery in the future;
2) at a price determined at the initiation of the contract;
3) that obligates each party to the contract to fulfill it at the specified price;
4) that is used to assume or shift risk; and
5) that may be satisfied by delivery or offsets.
Hedging
The purchase or sale of a security future to reduce or offset the risk of a position in the underlying security or group of securities (or a close economic equivalent).
Illiquid Market
A market (or contract) with few buyers and/or sellers. Illiquid markets have little trading activity and those trades that do occur may be done at large price increments.
Liquidation
Entering into an offsetting transaction. Selling a contract that was previously purchased offsets a futures position in the exact same way that selling 100 shares of a particular stock liquidates an earlier purchase of the same stock. Similarly, a futures contract that was initially sold can be liquidated with an offsetting purchase.
Liquid Market
A market (or contract) with numerous buyers and sellers trading at small price increments.
Long
1) the buying side of an open futures contract,
2) a person who has bought futures contracts that are still open.
Margin
The amount of money that must be deposited by both buyers and sellers to ensure performance of the person's obligations under a futures contract. Margin on security futures contracts is a performance bond rather than a down payment for the underlying security.
Mark-to-Market
To debit or credit accounts daily to reflect that day's profits or losses.
Narrow-Based Security Index
In general, and subject to certain exclusions, an index that has any one of the four characteristics
1) it has nine or fewer component securities
2) any one of its component securities compromises more than 30% of its weighting
3) the top five highest weighted securities together comprise more than 60% of its weighting
4) the lowest weighted component securities comprising, in aggregate, 25% of the index's weighting have an aggregate value of daily trading volume of less than $50 Million (or in the case of an index with 15 or more securities, $30 Million). A security index that is not narrow-based is a "broad based security index." (See Broad-based Security Index).
Nominal Value
The face value of the futures contract, obtained by multiplying the contract price by the number of units or shares per contract. If XYZ stock index futures are trading at $50.25 per share and the contract is for 100 shares of XYZ stock, then the nominal value of the futures contract would be $5,025.00.
Offsetting
liquidating open positions by either selling fungible contracts in the same contract month as an open long position or buying fungible contracts in the same contract month as an open short position.
Open Interest
The total number of open long (or short) positions in a given contract month.
Open Position
A futures contract position that has neither been offset nor closed by cash settlement or delivery.
Performance Bond
Another way to describe margin payments for futures contracts, which are good faith deposits to ensure performance of person's obligations under the futures contract rather than a down payment for the underlying security.
Physical Delivery
The tender or receipt of the actual security underlying the security futures contract in exchange for payment of the final settlement price.
Position
A person's net long or short open contracts.
Regulated Exchange
A registered national securities exchange, a national securities association registered under section 15(a) of the Securities Exchange Act of 1934, a designated contract market, a registered derivatives transactions execution facility, or an alternative trading system registered as a broker dealer.
Security Futures Contract
A legally binding agreement between two parties to purchase or sell in the future a specified number of shares of a security (such as common stock, an ETF or an ADR) or a narrow based security index, at a specified price.
Settlement Price
1) The daily price that the clearing organization uses to mark open positions to market for determining profit and loss and margin calls. 2) The price at which open cash contracts are settled on the last trading day and open physical contracts are invoiced for delivery.
Short
1) The selling side of an open futures contract.
2) A person who has sold futures contracts that are still open.
Speculating
Buying and selling futures contracts with the hope of profiting from anticipated price movements.
Spread
1) Holding a long position in one futures contract while holding a short position in a related contract or contract month in an attempt to profit from an anticipated price movement in the relationship between the two contracts.
2) The price difference between two futures contracts or contract months.
Stop Limit Order
An order that becomes a Limit Order when the market trades at a specific price. The order can only be filled at the stop limit price or better.
Stop Loss Order
An order that becomes a Market Order when the market trades at a specified price. The order will be filled at whatever price the market is trading at. Also called a stop order.
Tick
The smallest price movement allowed in a particular contract.
Trader
A professional speculator who trades for his own account.
Underlying Security
The instrument on which the security futures contract is based. This instrument can be an individual equity security (including common stocks, ETF's and ADR's) or narrow-based indexes.
Volume
The number of contracts bought or sold during a specified period of time. This figure includes liquidating transactions.
(back to top)
Market Order
A market order does not specify a price, it is executed at the best possible price available. A market order can keep the customer from 'chasing' a market.
Limit Order
The limit order is an order to buy or sell at a designated price. Limit Orders to buy are placed below the current price while limit orders to sell are placed above the current price. In most instances, the market must trade through the limit price for the customer to get a fill.
Market If Touched (MIT)
An MIT order is similar to a limit order in that a specific price is placed on the order. However, an MIT order becomes a market order once the limit price is touched or passed through. An execution may be at, above, or below the originally specified price. Buy MITs are placed below the current price and Sell MITs are placed above the current price.
Stop Order
A buy stop order is placed above the current market and is elected only when the market trades at or above, or is bid at or above, the stop price. A sell stop order is placed below the current market and is elected only when the market trades at or below, or is offered at or below, the stop price. Once the stop order is elected, the order is treated like a market order and will be filled at the best possible price.
Stop orders can be used for three purposes:
a. to minimize a loss on a long or short position
b. to protect a profit on an existing long or short position, or
c. to initiate a new long or short position.
Stop Limit Orders
A stop limit order lists two prices and is an attempt to gain more control over the price at which your stop is filled. The first part of the order is written like the above stop order. The second part of the order specifies a limit price. This indicates that once your stop is triggered, you do not wish to be filled beyond the limit price. Stop limit orders should usually not be used when trying to exit a position.
Stop Close Only
The stop price on a stop close only will only be triggered if the market touches the stop during the close of trading. The disadvantage of this order is a fast market in the last few minutes of trading may cause the order to be filled at an undesirable price. It can, however, protect the customer from getting filled during adverse price fluctuations during the course of the day.
One Cancels the Other (OCO)
This is a combination of two orders written on one order ticket. This instructs the floor broker that once one side of the order is filled, the remaining side of the order should be canceled. By placing both instructions on one order, rather than two separate tickets, the customer eliminates the possibility of a double fill.
Market On Close (MOC)
This is an order that will be filled during the final minutes of trading at whatever price is available.
Market On Opening (MOO)
This is an order that the customer wishes to be executed during the opening range of trading at the best possible price obtainable within the opening range.
Fill or Kill
A Fill or Kill order instructs the floor broker to buy or sell at your specified price and to immediately cancel the order if it is "unable" to be filled.
Or Better
The pit broker is obligated to get the best possible price for the customer. Think of OB as a market order with a limit. If the price does not have an OB next to it, and the market is considerably better, the pit broker may question the runner to see if the order should have been a stop. They may return the order for clarification, which could delay execution and possibly change the results of the fill.
(back to top)
Calendar Spread
The purchase and sale of options of the same class with the same strike but different expiration dates.
Vertical Spread
The purchase and sale of options of the same class with the same expiration dates but different strikes.
Bull Call Spread
Buy the call with the lower strike and sell the call with the higher strike price. The net result is a debit spread.
Bull Put Spread
Buy the put with the lower strike and sell the put with the higher strike price. The net result is a credit spread.
Bear Put Spread
Sell the put with the lower strike and buy the one with the higher strike price. The net result is a credit spread.
Bear Call Spread
Sell the call with the lower strike and buy the call with the higher strike price. The net result is a credit spread.
Straddles
Purchase or sale of both a put and a call on the same underlying contract with the same expiration and strike.
Long Straddle
Purchase both a put and a call. Done when the trader expects a large move but is not sure on the direction.
Short Straddle
Sell both a put and a call. Done when the trader expects little or no movement in the futures contract.
Strangles
Purchase or sale of both a put and a call on the same underlying contract with the same expiration but different strike prices.
Long Strangle
Purchase both a put and a call. Done when the trader expects a large move but is not sure on the direction.
Short Strangle
Purchase or sale of both a put and a call on the same underlying contract with the same expiration but different strike prices.
(back to top)
Combining two assets that, together, behave the same way as a related individual asset creates a synthetic position.
Synthetic Long Call
Long a put and long a futures contract
Synthetic Long Put
Long a call and short a futures contract
Synthetic Short Call
Short a put and short the futures contract
Synthetic Short Put
Short a call and long a futures contract
CBOT: Chicago Board of Trade
CME: Chicago Mercantile Exchange
COMEX: Commodity Exchange, Inc.
CSCE: New York Coffee, Sugar and Cocoa Exchange
IMM: International Monetary Market (Div. of CME)
IOM: Index and Options Market (Div. of CME)
KCBT: Kansas City Board of Trade
MACE: MidAmerica Commodity Exchange
MGE: Minneapolis Grain Exchange
NYFE: New York Futures Exchange
NYCE: New York Cotton Exchange
NYME: New York Mercantile Exchange
WPG: Winnipeg Commodity Exchange
F=Jan
G=Feb
H=Mar
J=Apr
K=May
M=Jun
N=Jul
Q=Aug
U=Sep
V=Oct
X=Nov
Z=Dec
(back to top)
|
