Glossary of Terms

Terms you may want to know in working with commodities related investments.
Courtesy of NFA’s Opportunity and Risk online pamphlet.



The policy under which all futures positions owned or controlled by one trader or a group of traders are combined to determine reportable positions and speculative limits.

The simultaneous purchase and sale of similar commodities in different markets to take advantage of a price discrepancy.

At-the-Money Option
An option whose strike price is equal—or approximately equal—to the current market price of the underlying futures contract.



Bear Market (Bear/Bearish)
A market in which prices are declining. A market participant who believes prices will move lower is called a “bear.”A news item is considered bearish if it is expected to result in lower prices.

Bear Call Spread
A spread designed to exploit falling exchange rates by purchasing a call option with a high exercise price and selling one with a low exercise price.
Bear Put Spread
A spread designed to exploit falling exchange rates by purchasing a put option with a high exercise price and selling one with a low exercise price.

An expression of willingness to buy a commodity at a given price; the opposite of Offer.

A company or individual that executes futures and options orders on behalf of financial and commercial institutions and/or the general public.

Break-Even Point
The price of a financial instrument at which the option buyer recovers the premium.

Bull Market (Bull/Bullish)
A market in which prices are rising. A market participant who believes prices will move higher is called a “bull.” A news item is considered bullish if it is expected to result in higher prices.



Call Option
An option which gives the buyer the right, but not the obligation, to purchase (“go long”) the underlying futures contract at the strike price on or before the expiration date.

Calendar Spread
An option position comprised of purchase and sale of two option contracts of the same type with different expiration dates at the same exercise price.

Carrying Broker
A member of a futures exchange, usually a clearinghouse member, through which another firm, broker or customer chooses to clear all or some trades.

Circuit Breaker
A system of trading halts and price limits on equities and derivatives markets designed to provide a cooling-off period during large, intraday market declines.

Commodity Futures Trading Commission (CFTC)
The federal regulatory agency established in 1974 that administers the Commodity Exchange Act. The CFTC monitors the futures and options on futures markets in the United States.

Commodity Pool
An enterprise in which funds contributed by a number of persons are combined for the purpose of trading futures or options contracts. The concept is similar to a mutual fund in the securities industry. Also

Commodity Pool Operator (CPO)
An individual or organization which operates or solicits funds for a commodity pool. A CPO is generally required to be registered with the CFTC.

Commodity Trading Advisor (CTA)
A person who, for compensation or profit, directly or indirectly advises others as to the advisability of buying or selling futures or commodity options. Providing advice includes exercising trading authority over a customer’s account. A CTA is generally required to be registered with the CFTC.

Confirmation Statement
A statement sent by a Futures Commission Merchant to a customer when a futures or options position has been initiated. The statement shows the price and the number of contracts bought or sold. Sometimes combined with a Purchase and Sale Statement.

Contract Month
The month in which delivery is to be made in accordance with the terms of the futures contract. Also referred to as Delivery Month.

The tendency for prices of physical commodities and futures to approach one another, usually during the delivery month.

A statistical measure referring to the relationship between two or more variables (events, occurrences etc.). A correlation between two variables suggests some causal relationship between these variables. Typically the Swiss Franc is closely correlated with the German Mark.

Covered Option
A short call or put option position, which is covered by the sale or purchase of the underlying futures contract or physical commodity.



Day Order
An order that if not executed expires automatically at the end of the trading session on the day it was entered.

Day Trader
A speculator who will normally initiate and offset a position within a single trading session.

A negative balance of trade or payments.

The change in the value of the option premium made fully paid by the capitalisation of reserves and given relative to the instantaneous change in the value of the; underlying instrument, expressed as a coefficient.

A financial instrument, traded on or off an exchange, the price of which is directly dependent upon the value of one or more underlying securities, equity indices, debt instruments, commodities, other derivative instruments, or any agreed upon pricing index or arrangement. Derivatives involve the trading of rights or obligations based on the underlying product but do not directly transfer property. They are used to hedge risk or to exchange a floating rate of return for a fixed rate of return.

Disclosure Document
The statement that must be provided to prospective customers that describes trading strategy, fees, performance, etc.

Discretionary Account
An arrangement by which the owner of the account gives written power of attorney to someone else, usually the broker or a Commodity Trading Advisor, to buy and sell without prior approval of the account owner. Also referred to as a Managed Account.



Electronic Order
An order placed electronically (without the use of a broker) either via the Internet or an electronic trading system.

Electronic Trading Systems
Systems that allow participating exchanges to list their products for trading after the close of the exchange’s open outcry trading hours (i.e., Chicago Board of Trade’s Project A, Chicago Mercantile Exchange’s GLOBEX and New York Mercantile Exchange’s ACCESS.)

The value of a futures trading account if all open positions were offset at the current market price.   Also known as Net Liquidation value.

The action taken by the holder of a call option if he wishes to purchase the underlying futures contract or by the holder of a put option if he wishes to sell the underlying futures contract.

Exercise Price
See Strike Price.

Expiration Date or Expiry Date
Generally the last date on which an option may be exercised. It is not uncommon for an option to expire on a specified date during the month prior to the delivery month for the underlying futures contracts.



Floor Broker
An individual who executes orders on the trading floor of an exchange for any other person.

Fully Disclosed
An account carried by a Futures Commission Merchant in the name of an individual customer; the opposite of an Omnibus Account.

Fundamental Analysis
A method of anticipating future price movement using supply and demand information.

Futures Commission Merchant (FCM)
An individual or organization that solicits or accepts orders to buy or sell futures contracts or commodity options and accepts money or other assets from customers in connection with such orders. An FCM must be registered with the CFTC.

Futures Contract
A legally binding agreement to buy or sell a commodity or financial instrument at a later date. Futures contracts are standardized according to the quality, quantity and delivery time and location for each commodity. The only variable is price.



A person who sells an option and assumes the obligation to sell (in the case of a call) or buy (in the case of a put) the underlying futures contract at the exercise price. Also referred to as an Option Seller or Writer.



The practice of offsetting the price risk inherent in any cash market position by taking an equal but opposite position in the futures market. A long hedge involves buying futures contracts to protect against possible increasing prices of commodities. A short hedge involves selling futures contracts to protect against possible declining prices of commodities.

The purchaser of either a call or put option. Option buyers receive the right, but not the obligation, to assume a futures position. The opposite of a Grantor. Also referred to as the Option Buyer.



In-the-Money Option
An option that has intrinsic value.  A call option is in-the-money if its strike price is below the current price of the underlying futures contract. A put option is in-the-money if its strike price is above the current price of the underlying futures contract.

Initial Margin
The amount a futures market participant must deposit into a margin account at the time an order is placed to buy or sell a futures contract. See also Margin.

Intrinsic Value
The amount by which an option is in-the money.



The ability to control large dollar amounts of a commodity with a comparatively small amount of capital.

To take a second futures or options position opposite to the initial or opening position. To sell (or purchase) futures contracts of the same delivery month purchased (or sold) during an earlier transaction or make (or take) delivery of the cash commodity represented by the futures market.  Also referred to as Offset.

Liquidity (Liquid Market)
A characteristic of a security or commodity market with enough units outstanding to allow large transactions without a substantial change in price.

One who has bought futures contracts or owns a cash commodity.

The lowest price of the day for a particular futures contract.



Maintenance Margin
A set minimum margin (per outstanding futures contract) that a customer must maintain in his margin account to retain the futures position. See also Margin.

Managed Account
An account that is managed on a discretionary basis by a third party Commodity Trading Advisor (CTA).  See Discretionary Account.

Managed Funds Association (MFA)
The trade association for the managed funds industry.

An amount of money deposited by both buyers and sellers of futures contracts and by sellers of options contracts to ensure performance of the terms of the contract (the making or taking delivery of the commodity or the cancellation of the position by a subsequent offsetting trade). Margin in commodities is not a down payment, as in securities, but rather a performance bond. See also Initial Margin, Maintenance Margin and Variation Margin.

Margin Call
A call from a clearinghouse to a clearing member, or from a broker or firm to a customer, to bring margin deposits up to a required minimum level.

To debit or credit on a daily basis a margin account based on the close of that day’s trading session. In this way, buyers and sellers are protected against the possibility of contract default.

Market Order
An order to buy or sell a futures or options contract at whatever price is obtainable when the order reaches the trading floor.



Naked Option
See Uncovered Option.  Naked refers to selling short or writing an option contract that has a characteristic of unlimited risk.

National Futures Association (NFA)
Authorized by Congress in 1974 and designated by the CFTC in 1982 as a “registered futures association,” NFA is the industrywide self-regulatory organization of the futures industry.

Net Asset Value
The value of each unit of participation in a commodity pool. Basically a calculation of assets minus liabilities plus or minus the value of open positions when marked to the market, divided by the total number of outstanding units.

Net Performance
An increase or decrease in net asset value exclusive of additions, withdrawals and redemptions.



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

Open Interest
The total number of futures or options contracts of a given commodity that have not yet been offset by an opposite futures or option transaction nor fulfilled by delivery of the commodity or option exercise. Each open transaction has a buyer and a seller, but for calculation of open interest, only one side of the contract is counted.

Open Outcry
A method of public auction for making bids and offers in the trading pits of futures exchanges.

Open Trade Equity
The unrealized gain or loss on open futures positions.

Option Contract
A contract which gives the buyer the right, but not the obligation, to buy or sell a specified quantity of a commodity or a futures contract at a specific price within a specified period of time. The seller of the option has the obligation to sell the commodity or futures contract or buy it from the option buyer at the exercise price if the option is exercised. See also Call Option and Put Option.

Option Premium
The price a buyer pays (and a seller receives) for an option. Premiums are arrived at through open outcry. There are two components in determining this price—extrinsic (or time) value and intrinsic value.

Option Seller:  see Grantor

Out-of-the-Money Option
A call option with a strike price higher or a put option with a strike price lower than the current market value of the underlying asset, (i.e., an option that does not have any intrinsic value).


The area on the trading floor where trading in futures or options contracts is conducted by open outcry.
A commitment, either long or short, in the market.

Position Trader
A trader who either buys or sells contracts and holds them for an extended period of time, as distinguished from a day trader.

Refers to (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 price; (4) the price paid by the buyer of an option; or (5) the price received by the seller of an option.

Price Discovery
The process of determining the price of a commodity by trading conducted in open outcry at an exchange.

Price Limit
The maximum advance or decline, from the previous day’s settlement price, permitted for a futures contract in one trading session. Also referred to as Maximum Price Fluctuation and Limit Up or Limit Down.

Purchase and Sale Statement (P&S)
A statement sent by a Futures Commission Merchant to a customer when a futures or options position has been liquidated or offset. The statement shows the number of contracts bought or sold, the prices at which the contracts were bought or sold, the gross profit or loss, the commission charges and the net profit or loss on the transaction. Sometimes combined with a Confirmation Statement.

Put Option
An option that gives the buyer the right, but not the obligation, to sell the underlying futures contracts at a particular price (strike or exercise price) on or before a particular date.




The actual price or the bid and ask price of either cash commodities or futures or options contracts at a particular time.



The difference between the high and low price of a commodity during a given trading session, week, month, year, etc.

Risk-Free Rate of Return

The risk-free rate of return is the return of the shortest dated U.S government T-bill.  This rate is published in the Wall Street Journal daily.

Round Turn
A completed futures transaction involving both a purchase and a liquidating sale, or a sale followed by a covering purchase.



A trader who trades for small, short-term profits during the course of a trading session, rarely carrying a position overnight.

Segregated Account
A special account used to hold and separate customers’ assets from those of the broker or firm.

Settlement Price
The last price paid for a futures contract on any trading day. Settlement prices are used to determine open trade equity, margin calls and invoice prices for deliveries.

Sharpe Ratio
Developed by William Sharpe in 1966, the Sharpe ratio measures how much return is given in a particular investment for a certain level of risk.  The calculation is:  Sharpe Ratio = (average rate of return less 3 month T-bill)/Standard Deviation or Worst Drawdown of the investment.  For Example, if Manager X has averaged 14% for the past 5 years, but the worst monthly drawdown was 10%, the Sharpe ratio for Manager X would be:  (14% – 0.45%)/10% = 1.35.  Usually an investor will want to see a Sharpe ratio greater than 1.  The higher the Sharpe ratio, the better.

One who has sold futures contracts or plans to purchase a cash commodity (e.g., a food processor).

A market participant who tries to profit from buying and selling futures and options contracts by anticipating future price movements. Speculators assume market price risk and add liquidity and capital to the futures markets.

Usually refers to a cash market price for a physical commodity that is available for immediate delivery.

The simultaneous buying and selling of two related markets or commodities in the expectation that a profit will be made when the position is offset.

Stop Order
An order that becomes a market order when the futures contract reaches a particular price level. A sell stop is placed below the market, a buy stop is placed above the market.

Strike Price
The price at which the buyer of a call (put) option may choose to exercise his right to purchase (sell) the underlying futures contract. Also called Exercise Price.

In general, the exchange of one asset or liability for a similar asset or liability for the purpose of lengthening or shortening maturities, or raising or lowering coupon rates, to maximize revenue or minimize financing costs.



Technical Analysis
An approach to analysis of futures markets which examines patterns of price change, rates of change, and changes in volume of trading, open interest and other statistical indicators. See also Charting.

A measure of the sensitivity of the price of an option to a change in its time to expiry.

The smallest allowable increment of price movement for a futures contract. Also referred to as Minimum Price Fluctuation.

Time Value
The amount of money options buyers are willing to pay for an option in anticipation that over time a change in the underlying futures price will cause the option to increase in value. In general, an option premium is the sum of time value and intrinsic value.  Any amount by which an option premium exceeds the option’s intrinsic value can be considered time value. Also referred to as Extrinsic Value.

Time Decay
The decline in the time value of an option as the expiry approaches.



Uncovered Option
A short call or put option position which is not covered by the purchase or sale of the underlying futures contract or physical commodity. Also referred to as a Naked Option.

Underlying Futures Contract
The specific futures contract that the option conveys the right to buy (in case of a call) or sell (in the case of a put).



Variation Margin
Additional margin required to be deposited by a clearing member firm to the clearinghouse during periods of great market volatility or in the case of high-risk accounts.  Also known as span margin.

Expresses the price change of an option for a one per cent change in the implied volatility. 

A measure of the amount by which an asset price is expected to fluctuate over a given period. Normally measured by the annual standard deviation of daily price changes. (historic). Can be implied from futures pricing, implied volatility.

The number of purchases and sales of futures contracts made during a specified period of time, often the total transactions for one trading day.


Wire House
See Futures Commission Merchant.

See Grantor.




A measure of the annual return on an investment.