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Glossary Of Futures Trading Terminology

Index by alphabetical order

A, B, C, D, E, F G, H, I, J, K, L, M, N, O, P, Q, R, S, T, U, V, W, X, Y, Z











A

Accumulation - When stocks start moving sideways after a significant drop as investors start accumulating.

Arbitrage - The simultaneous purchase and sale of financial instruments in order to benefit from price discrepancies. Futures traders look buys overpriced underlying and short futures or vice versa in order to perform a futures arbitrage. Read the tutorial on Futures Arbitrage.

Aggregation - The Policy where all futures positions owned or controlled by one trader or a group of traders are combined to determine reportable positions and speculative limits.

Ask Price- As used in the phrase 'bid and asked' it is the price at which a potential seller is willing to sell. Another way of saying this is the asking price for what someone is selling. You buy futures contracts on their Ask price.

Assign - Term used by Futures Options to designate an option writer for fulfillment of his obligation to sell the underlying futures (call option writer) or buy the underlying futures (put option writer).

Associated Person (AP) - An individual registered with the Commodity Futures Trading Commission who solicits orders on behalf of a Futures Commission Merchant, an Introducing Broker, a Commodity Trading Advisor or a Commodity Pool Operator.

At the Money - When a futures option's strike price is the same as the prevailing stock price. Read More About At The Money Options.

Automatic Exercise - A protection procedure whereby the Options Clearing Corporation attempts to protect the holder of an expiring in-the-money futures options by automatically exercising the options on behalf of the holder.



B

Back Months - Delivery / expiration months other than the immediate month.

Backwardation - When futures price is below spot price and is converging upwards towards the spot price as expiration approaches.

Basis -Difference between spot price and the nearest futures price. Read the tutorial on Basis.

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

Basis Point -One basis point equals to 1/100 of one percent.

Basis Quote -Price quote in terms of difference above or below futures price.

Basis Risk -Risk caused by volatility of Basis. Read the tutorial on Basis Risk.

Basis Swap -A swap whose cash settlement price is based on Basis.

Bearish -  An opinion  that expects a decline in price, either by the general market or by an underlying stock, or both.

Bearish Options Strategies - Different ways to use options in order profit from a downwards move in the underlying stock. Read the tutorial on Bearish Options Strategies.

Bear Spread - A futures position which is short near term contracts and long further term contracts. Read more about Bear Spread.

Bear Trap - Any technically unconfirmed downward move that encourages investors to be bearish. It usually precedes strong rallies and often catches the unwary.

Beta - A figure that indicates the historical propensity of a stock price to move with the stock market as a whole.

Bid Price - The price at which a potential buyer is willing to buy from you. This means that you sell at the Bid Price.

Bid/Ask Spread - The difference between the prevailing bid and ask price.

Black-Scholes Model - A mathematical formula designed to price an option as a function of certain variables-generally stock price, striking price, volatility, time to expiration, dividends to be paid, and the current risk-free interest rate. Read More About Black-Scholes model.

Break - Even Point-the stock price (or prices) at which a particular strategy neither makes nor loses money. It generally pertains to the result at the expiration date of the options involved in the strategy. A "dynamic" break-even point is one that changes as time passes.

Breadth - The net number of stocks advancing versus those declining. When advances exceed declines the breadth of the market is inclining. When the declines exceed advances the market is declining.

Breakout - What occurs when a stock price or average moves above a previous high resistance level or below a previous low support level. The odds are that the trend will continue.

Bullish - An opinion in which one expects a rise in price, either by the general market or by an individual security.

Bull Spread - A futures position consisting of going long a near term futures contract and simultaneously going short a further term futures contract. Read more about Bull Spread.

Bull Trap - Any technically unconfirmed move to the upside that encourages investors to be bullish. Usually precedes important declines and often fools those who do not wait form confirmation by other indicators.

Butterfly Spread - A futures position consisting of going long a near term futures contract and far term futures contract and simultaneously going short twice the amount of mid term futures contract. Read more about Butterfly Spread.

Booking the Basis -A forward pricing sales arrangement in which the cash price is determined either by the buyer or seller within a specified time. At that time, the previously-agreed basis is applied to the then-current futures quotation.



C

Call -see Call Option.

Called Away - The process in which a call option writer is obligated to surrender the underlying stock to the option buyer at a price equal to the strike price of the call option.

Call Options -Options which gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time. Read All About Call Options .

Capitalization - The total amount of securities issued by a corporation. This may include: bonds, debentures, preferred stock, common stock and surplus.

Carrying Charges - In futures trading, it is the cost of holding the underlying asset over a period of time.

Cash Settlement - A method of settling a futures contract where the cash difference between the futures price and the spot price is exchanged instead of a physical asset. Read the full tutorial on Cash Delivery.

CBOE - The Chicago Board Options Exchange; the first national exchange to trade listed stock options.

Cheapest-to-Deliver - A class of bonds or notes deliverable against an expiring bond or note futures contract.

Clearing - The procedure where a clearing house takes the other side of each futures contract in order to close these futures contracts out.

Clearing house / Clearing Organization - An organisation through which futures and other derivative transactions are cleared and settled.

Clearing member - A representative of a clearing house which works directly with futures traders.

Clearing price - The settlement price of a futures contract.

Close - Period at the end of a trading day where final prices for the day are calculated.

Closing-Out - Closing a futures position with an equal and opposite transaction. Also known as Offsetting.

Contango - When futures price is above spot price and converging downwards toward the spot price as expiration approaches. Read the full tutorial on Contango.

Correction - When a stock drops in price temporarily before rebounding later.

Commitment of Traders (COT) Report - A weekly report from the CFTC providing a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC.

Commodity - A commodity, as defined in the Commodity Exchange Act, includes the agricultural commodities enumerated in Section 1a(4) of the Commodity Exchange Act and all other goods and articles, except onions as provided in Public Law 85-839 (7 U.S.C. § 13-1), a 1958 law that banned futures trading in onions, and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in.

Commodity Exchange Act - The Commodity Exchange Act, 7 USC 1, et seq., provides for the federal regulation of commodity futures and options trading.

Commodity Futures - Futures contracts that has physical commodities as their underlying asset. Read the full tutorial on commodity futures.

Commodity Futures Trading Commission (CFTC) - The Federal regulatory agency established by the Commodity Futures Trading Act of 1974 to administer the Commodity Exchange Act.

Commodity Pool - A company or entity trading solely in commodity futures and options with a pooled fund.

Commodity Price Index - An index reflecting the general commodity market through the price of a basket of commodities.

Contract Size - The amount of underlying asset covered by each futures contract.

Commodity Trading Advisor (CTA) - A professional analyst engaged in investment advisory for the trading of commodities, commodities futures and commodities options.

Contract Market - A Futures or Options exchange operating under the Commodity Exchange Act.

Contrary Opinion - The belief opposite that of the general public and/or Wall Street. It is most significant at major market turning points. An overall consensus of opinion, whether bullish or bearish, usually marks an extreme. An investor taking a contrary view will usually benefit in time.

Convergence - Also known as "Narrowing of the Basis" in futures trading. It is when futures price and the price of the actual commodity starts to approach each other as expiration approaches.

Cost of Tender - Cost of taking physical delivery on a futures contract.

Counterparty - The person or entity taking the other side of a futures trade.

Credit - Money received in an account. A credit transaction is one in which the net sale proceeds are larger than the net buy proceeds (cost), thereby bringing money into the account. There are many credit option strategies. Read All About Debit And Credit Spreads Here!

Crop Year - The time between harvests of each different commodity.

Currency Futures - See "Forex Futures".



D

Day Order - An order that expires at the end of the trading day if it is not executed.

Day trader / Daytrader - Traders who open and close option positions or multiple option positions all within the same trading day.

Day trading / Daytrading - Trading methodolody that involves making multiple trades that are opened and closed all within the same trading day.

Daily Settlement - The process of determining the closing price and settling profit and loss between the long and the short at the end of each trading day. Read the full tutorial on Futures Daily Settlement.

Dealer - An individual or firm providing liquidity for the trading of a specific asset.

Debit - An expense, or money paid out from an account. A debit transaction is one in which the net cost is greater than the net sale proceeds.

Default - To fail to perform one's obligations under the terms of a futures contract.

Deliverable Stocks - Commodities in stock ready for delivery on fulfillment of a futures contract.

Deliverable Supply - Amount of commodities in stock that is supposed to be delivered on fulfillment of a futures contract.

Delivery - The handing over of the assets outlined in the terms of a futures contract.

Delivery Date - The date the deliverable stocks are to be handed over in accordance with the terms of a futures contract.

Delivery Month - The month in which a futures contract expires.

Delivery Price - The price at which the deliverable stocks are invoiced.

Delta - The sensitivity of a futures option's price to changes in price of the underlying futures.

Delta Neutral - When positive delta options and negative delta options offset each other to produce a position which neither gains nor decreases in value as the underlying futures moves slightly up or down.

Deposit - The initial margin payable when a futures position is put on.

Derivatives - A financial instrument whose value is derived in part from the value and characteristics of another financial instrument. Examples of derivatives are options, futures and warrants.

Discount Broker - A brokerage firm that offers low commission rates.

Dominant Future - The futures contract having the largest open interest.

Dynamic Hedging - A hedging technique which requires constantly rebalancing in order to maintain the hedge ratio.



E

Early Exercise (assignment) - The exercise or assignment of a futures option contract before its expiration date.

Enumerated Agricultural Commodities - The commodities specifically listed in Section 1a(3) 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.

Exchange for Physicals (EFP) - A transaction in which the buyer of a cash commodity transfers to the seller a corresponding amount of long futures contracts, or receives from the seller a corresponding amount of short futures, at a price difference mutually agreed upon. In this way, the opposite hedges in futures of both parties are closed out simultaneously. Also called Exchange of Futures for Cash, AA (against actuals), or Ex-Pit transactions.

Exchange of Futures for Swaps (EFS) - A privately negotiated transaction in which a position in a physical delivery futures contract is exchanged for a cash-settled swap position in the same or a related commodity, pursuant to the rules of a futures exchange. See Exchange for Physicals.

Excluded Commodity - Any financial instrument such as a security, currency, interest rate, debt instrument, or credit rating; any economic or commercial index other than a narrow-based commodity index; or any other value that is out of the control of participants and is associated with an economic consequence.

Exempt Commodity - Any commodity that is not an excluded commodity or agricultural product.

Exercise - To invoke the right granted under the terms of a listed options contract. The holder is the one who exercises. Call holders exercise to buy the underlying security, while put holders exercise to sell the underlying security.

Exercise Limit - The limit on the number of contracts which a holder can exercise in a fixed period of time. Set by the appropriate option exchange, it is designed to prevent an investor or group of investors from "cornering" the market in a stock.

Expected Return - A rather complex mathematical analysis involving statistical distribution of stock prices, it is the return which an investor might expect to make on an investment if he were to make exactly the same investment many times throughout history.

Expiration Date - The day on which an option contract becomes void. The expiration date for listed options is the Saturday after the third Friday of the expiration month. All holders of options must indicate their desire to exercise, if they wish to do so, by this date. Read more about Futures Expiration.

Expiration Time - The time of day by which all exercise notices must be received on the expiration date. Technically, the expiration time is currently 5:00 PM on the expiration date, but public holders of option contracts must indicate their desire to exercise no later than 5:30 PM on the business day preceding the expiration date. The times are Eastern Time.



F

Fair Value - A term used to describe the worth of an option or futures contract as determined by a mathematical model.

Financial Instrument - A physical or electronic document that has intrinsic monetary value or transfers value. For example, cash, shares, futures, options and precious metals are financial instruments.

Five Against Bond (FAB) Spread - A futures spread trade involving the buying (selling) of a five-year Treasury note futures contract and the selling (buying) of a long-term (15-30 year) Treasury bond futures contract.

Five Against Note (FAN) Spread - A futures spread trade involving the buying (selling) of a five-year Treasury note futures contract and the selling (buying) of a ten-year Treasury note futures contract.

Final Settlement Price - The price at which cash-settled futures contracts are settled at maturity. Read the full tutorial on Final Settlement.

Financial Futures - Futures contracts offered on financial securities such as forex and indexes.Read more about Financial Futures.

Financial Settlement - Another term for Cash-Settlement.

First Notice Day - The first day on which notices of intent to deliver actual commodities against futures market positions can be received. First notice day may vary with each commodity and exchange.

Forced Liquidation - Liquidation of a customer's futures trading account by the broker after failing to meet margin calls.

Forex Futures - Futures contracts with currencies as their underlying assets. Read more about Forex Futures.

Forwardation - Another term for Contango.

Fundamental Analysis - A method of analyzing the prospects of a security by observing accepted accounting measures such as earnings, sales, assets, and so on.

Fungibility - The characteristic of interchangeability. Futures contracts for the same commodity and delivery month traded on the same exchange are fungible due to their standardized specifications for quality, quantity, delivery date, and delivery locations.

Full Contract Value - The total value of assets covered by a futures contract or futures position. Read more about Full Contract Value.

Futures Chain - A table listing all available futures contracts available for trading on an asset. Read more about Futures Chain.

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

Futures Option - An option with Futures as its underlying asset.

Futures Price - (1) The price of a commodity for future delivery that is traded on a futures exchange; (2) the price of any futures contract.



G

Goldilock Economy - An economy that has steady growth and moderate inflation which is neither too heated nor cold and allows for stock market friendly monetary policies.

Good Until Canceled (GTC) - A designation applied to some types of orders, meaning that the order remains in effect until it is either filled or cancelled.

Going Forward - Analyst's Jargon. Meaning "In The Future". 12 months going forward means 12 months in the future.

Grocession - A prolonged period of 0 to 2% growth in GDP that will feel like a recession.

Grades - Various qualities of a commodity.

Grading Certificates - An inspection certificate on the grade of a commodity.



H

Hedge - Taking a position in a futures market opposite to a position held in the cash market to minimize the risk of financial loss from an adverse price change; or a purchase or sale of futures as a temporary substitute for a cash transaction that will occur later. One can hedge either a long cash market position (e.g., one owns the cash commodity) or a short cash market position (e.g., one plans on buying the cash commodity in the future).

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 of a futures contract, security, or other instrument over a specified number of past trading days.

Horizontal Spread - An option strategy in which the options have the same strike price, but different expiration dates.



I

Implied Volatility - A measure of the volatility of the underlying futures, determined using their options prices, rather than using historical data on the price changes of the underlying futures.

Implied Repo Rate - Rate of return from selling a debt instrument futures contract and simultaneously buying a bond or note deliverable against that futures contract with borrowed funds.

Index - A compilation of the prices of several common entities into a single number.

Index Arbitrage- The simultaneous purchase (sale) of stock index futures and the sale (purchase) of some or all of the component stocks that make up the particular stock index to profit from sufficiently large intermarket spreads between the futures contract and the index itself.

Index Futures - Futures contracts with an index as its underlying asset instead of a physical asset. Read more about Index Futures.

Initial Deposit / Initial Margin- Amount of money put up as guarantee when taking a futures position. Read more about Initial Margin.

Intercommodity Spread / Intermarket Spread - A futures spread in which the long and short legs are in two different but generally related commodity markets.

Interdelivery Spread / Intracommodity Spread - A futures spread involving two different months of the same commodity.

Interest Rate Futures - Futures contracts with fixed income securities such as U.S. Treasury issues, or based on the levels of specified interest rates such as LIBOR (London Interbank Offered Rate) as its underlying asset.

Intrinsic Value - The value of an option if it were to expire immediately with the underlying stock at its current price; the amount by which an option is in-the-money. For call options, this is the difference between the stock price and the striking price, if that difference is a positive number, or zero otherwise. For put options it is the difference between the striking price and the stock price, if that difference is positive, and zero otherwise. Read the full tutorial on Intrinsic Value !

Inverted Market - When futures prices are progressively lower with longer expiration. Read the full tutorial on Inverted Market !



L

Last Trading Day - Day on which trading ceases for the maturing (current) delivery month.

Last Notice Day - The final day on which notices of intent to deliver on futures contracts may be issued.

Leverage - In investments, the attainment of greater percentage profit and risk potential. In futures trading, leverage comes from the fact that a position can be controlled with as little as 10% of the total price.

Licensed Warehouse - A warehouse approved by an exchange from which a commodity may be delivered on a futures contract.

Life of Contract - The time period between when a futures contract is opened to the time it expires.

Limit - See Trading Limit.

Limit Order - An order to buy or sell securities at a specified price (the limit).

Liquid / Liquidity - The ease at which a purchase or sale can be made without disrupting existing market prices.

Local - Floor Trader.

Long - To be long a futures contract is to take the buyer side of the contract. Read more about Long and Short.

Long the Basis - To buy the spot and short the futures.



M

Maintenance Margin - The level of fund existing in a futures position below which a margin call will be issued and the account is to be topped back up to its initial margin. Read more about Maintenance Margin.

Margin (stocks) - To buy a security by borrowing funds from a brokerage house. The margin requirement-the maximum percentage of the investment that can be loaned by the brokerage firm-is set by the Federal Reserve Board.

Margin (options) - Cash deposit needed to be held in account when writing options.

Margin Account - An account that allows the holder to trade on collateral and borrow from the broker. Margin accounts are required for futures trading. Read more about Margin Accounts.

Margin Call - A request from the broker to top up one's account to its initial margin. Read more about Margin Call.

Marked-To-Model - A valuation method using financial models for level 2 assets, which are less liquid assets that are hard to value due to an absence of a readily available market.

Market Maker - An exchange member whose function is to aid in the making of a market, by making bids and offers for his account in the absence of public buy or sell orders. Several market-makers are normally assigned to a particular security. The market-maker system encompasses the market-makers and the board brokers.

Market Order - An order to buy or sell securities at the current market. The order will be filled as long as there is a market for the security. Read All About Options Orders Here!

Market On Close (MOC) - An option trading order that fills a position at or near market close.

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

Multiple Compression - Where the overall market sell off over a period of time in order to generally reduce PE ratios across the board due to pessimism about the macro economy.

Multiple Expansion - Where the overall market rallies over a period of time in order to generally increase PE ratios across the board due to optimism about the macro economy.



N

Narrow Based - Generally referring to an index, it indicates that the index is composed of only a few stocks, generally in a specific industry group. Narrow-based indices are NOT subject to favorable treatment for naked option writers.

National Futures Association (NFA) - A self-regulatory organization whose members include futures commission merchants, commodity pool operators, commodity trading advisors, introducing brokers, commodity exchanges, commercial firms, and banks, that is responsible—under CFTC oversight—for certain aspects of the regulation of FCMs, CPOs, CTAs, IBs, and their associated persons, focusing primarily on the qualifications and proficiency, financial condition, retail sales practices, and business conduct of these futures professionals. NFA also performs arbitration and dispute resolution functions for industry participants.

Nearby Delivery Month - Futures contracts that are closest to maturity. Also known as front month.

Negative Carry - The cost of financing a financial instrument (the short-term rate of interest), when the cost is above the current return of the financial instrument.

Net Asset Value (NAV) - The value of each unit of participation in a commodity pool.

Net Position - The difference between long and short futures positions.

Neutral - Describing an opinion that is neither bearish or bullish. Neutral option strategies are generally designed to perform best if there is little or no net change in the price of the underlying stock.

Nominal Price / Nominal Quotation - Computed price quotation on a futures or option contract for a period in which no actual trading took place, usually an average of bid and asked prices or computed using historical or theoretical relationships to more active contracts.

Normal Market / Normal Futures Curve - When futures prices is progressively higher with longer expiration.

Notice Day - Any day on which notices of intent to deliver on futures contracts may be issued.

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.



O

Offset - To close out a futures position by taking an equal and opposite futures position. Read the tutorial on Offsetting.

One Sided Market - A market condition where there are significantly more sellers than buyers or more buyers than sellers. In this case, there are not enough buyers putting up offers to buy from sellers or that there are not enough sellers putting up offers to sell to buyers.

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. Read more about Open Interest.

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

Option - The right to buy or sell specific securities at a specified price within a specified time. A put gives the holder the right to sell the stock, a call the right to buy the stock.

Options Clearing Corporation (OCC) - The issuer of all listed option contracts that are trading on the national option exchanges.

Options Margin - See "Margin (Options)".

Original Margin - Another name for Initial Margin. The initial deposit required for opening a new futures position.

Outright - To purchase futures contracts directly not as part of a spread.

Overvalued - Describing a security trading at a higher price than it logically should. Normally associated with the results of option price predictions by mathematical models. If an option is trading in the market for a higher price than the model indicates, the option is said to be overvalued.



P

Pack Butterfly Spread - Consists of a butterfly spread with each of the legs being a Pack. Buy 1 pack butterfly = buy 1 near term pack, sell 2 middle term pack, and buy 1 of the longer term pack.

Pack - Simultaneous purchase or sale of an equally weighted, consecutive series of futures. The Pack Spread consists of 4 contractsof consecutive quarterly maturity months with each leg (+1:+1:+1:+1 ratio)

P&S (Purchase & Sale) Statement - A statement reflecting changes in a futures trader's account.

Par - Refers to the standard delivery point(s) and/or quality of a commodity that is deliverable on a futures contract at contract price. Serves as a benchmark upon which to base discounts or premiums for varying quality and delivery locations;

Pegged Price - The price at which a commodity has been fixed.

Physical Delivery - Futures contracts that delivers the actual physical asset covered upon expiration. Read more about Physical Delivery.

Pip - The smallest price unit for commodities or currencies.

Portfolio -Holdings of securities by an individual or institution. A portfolio may contain options of different stocks or a combination of shares, options and other financial instruments.

Portfolio Insurance -The use of futures or options to hedge a portfolio of stocks.

Position - A Position is established as long as futures contracts are longed or shorted in one's account.

Position Sizing - Technique of determining the amount of futures contracts to trade in order to adhere to one's risk policies.

Position Trading - A trading method by which futures contracts are bought and held for extended period of time.

Positive Carry -Where the cost of holding onto a position is lesser than the returns made on the position.

Price Basing -A situation where producers, processors, merchants, or consumers of a commodity establish commercial transaction prices based on the futures prices for that or a related commodity (e.g., an offer to sell corn at 5 cents over the December futures price). This phenomenon is commonly observed in grain and metal markets.

Price Discovery -The process of determining the price level for a commodity based on supply and demand conditions.

Pull back - A temporary fall in price after a rally. The rally usually continues after a Pull Back. This is also known as a "Correction".

Put - An option granting the holder the right to sell the underlying security at a certain price for a specified period of time. See also Call. Read About Put Options Here.

Pyramiding - The use of profits on existing positions as margin to increase the size of the position, normally in successively smaller increments.



Q

Quadruple Witching - The third Friday of March, June, September and December when Index Futures, Index Options, Stock Futures and Stock Options expire. This is one of the most volatile trading days of the year, with exceptionally high trading volume. Read all about Quadruple Witching.



R

Realize (a profit or loss) - The act of closing a position, incurring a profit or a loss. As long as a position is not closed, the profit or loss remains unrealized.

Reference Asset - An asset, such as a corporate or sovereign debt instrument, that underlies a credit derivative.

Resistance - A term in technical analysis indicating a price area higher than the current stock price where an abundance of supply exists for the stock, and therefore the stock may have trouble rising through the price.

Reward / Risk Ratio - A gauge of how risky a position can be by dividing its maximum profit potential against the maximum loss potential. A ratio of above 1 means that the potential reward is higher than the potential loss.

Return On Investment (ROI) - The percentage profit that one makes, or might make, on his investment.

Reverse / Stop And Reverse - A futures order which simultaneously close out your existing position and then open new positions on the same futures contracts in the opposite direction. Read all about Reverse.

Reverse Crush Spread - The sale of soybean futures and the simultaneous purchase of soybean oil and meal futures.

Risk Free Return - Profit on a risk free investment instrument such as the Treasury bills. It is a common standard of measuring the opportunity cost of having your money in anything other than Treasury bills.

Rotation - A trading procedure on the option exchanges whereby bids and offers, but not necessarily trades, are made sequentially for each series of options on an underlying stock.

Round Lot - A quantity of a commodity equal in size to the corresponding futures contract for the commodity.

Roll Forward - Closing off a near term futures contract and simultaneously opening the same quantity of a further term futures contract. Read all about Roll Forward.

Roll Yield - The resultant profit or loss when futures price converge on the spot price upon expiration. Read all about Roll Yield.



S

Sample Grade - The lowest quality produce of a commodity.

Security / Securities - (finance) A tradable financial instrument signifying ownership in financial assets issued by companies or governments. Such financial assets includes but are not restricted to stocks, bonds, futures and debts.

Selling Climax - Exceptionally heavy volume created when panic-stricken investors dump stocks.Often this marks the end of a bear market and is a spot to buy.

Settlement - The process and method by which profit and loss in a futures contract is determined and how a futures contract is finally closed. Read more about Futures Settlement.

Settlement Price - The official end of day price for a futures contract determined by averaging the prices of trades made during the closing period.

Short (to be short) - To Short means to take the seller side of a futures contract. Read more about Long and Short.

Short The Basis - Using futures as a hedge against short cash or commodities position.

Single Stock Futures (SSF) - Futures contracts with stocks as its underlying asset. Read the full tutorial on Single Stock Futures.

Spread Order - An order to simultaneously transact two or more option trades. Typically, one option would be bought while another would simultaneously be sold. Spread orders may be limit orders, not held orders, or orders with discretion. They cannot be stop orders, however. The spread order may be either a debit or credit.

Spot - Immediate payment for and delivery of goods.

Spot Commodity - Actual commodity covered under a Futures Contract.

Spread - A futures position made up of both long and short futures contracts. Read the full tutorial on Futures Spreads.

Static Hedging - A hedging technique where a hedging trade is established and held without needing to rebalance.

Stock Options - Options contracts with shares as the underlying asset. Read All About Stock Options.

Stop Limit Order - Similar to a stop order, the stop-limit order becomes a limit order, rather than a market order, when the security trades at the price specified on the stop.

Stop Order - A traditional stop loss method which closes a position when a predetermined price is hit. Read All About Options Orders Here!

Strategy - With respect to option investments, a preconceived, logical plan of position selection and follow-up action.

Support - A term in technical analysis indicating a price area lower than the current price of the stock, where demand is thought to exist. Thus a stock would stop declining when it reached a support area. See also Resistance.

Swing Trading - A trading methodology that trades short term price swings for short term profits.

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



T

Take Delivery - To fulfill the obligation of buying stocks when put options that you sold becomes exercised.

Technical Analysis - The method of predicting future stock price movements based on observation of historical stock price movements.

Ted Spread - The difference between the price of the three-month U.S. Treasury bill futures contract and the price of the three-month Eurodollar time deposit futures contract with the same expiration month.

Tender - To give notice to the clearing organization of the intention to initiate delivery of the physical commodity in satisfaction of a short futures contract.

Term Structure - The price curve formed by the prices of futures contracts over various expiration months. Read more about Futures Term Structure.

Tick - A minimum change in price in either direction. Read All About Minimum Tick.

Ticker Symbol - Symbol representing the shares and options of a company's shares traded in the stock market. MSFT is the ticker symbol for Micrsoft shares while MSQFB is the ticker symbol for Microsoft's June29Call options.

Time of day order - An order that is to be executed only at certain predetermined times of the day.

Topping Out - A peak point where the sellers begin to outnumber the buyers.

Trading Limit - The exchange imposed maximum daily price change that a futures contract or futures option contract can undergo.

Trend - The direction of a price movement. A trend in motion is assumed to remain intact until there is a clear change.

Triple Witching - Prior to 2001. The third Friday of March, June, September, and December, when stock options, index futures and options on index futures expire. After 2001, the introduction of Single Stock Futures transformed Triple Witching into Quadruple Witching as single stock futures expire on the third Friday of every quarterly month as well.



U

Underlying Asset - 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.

Undervalued - Describing a security that is trading at a lower price than it logically should. Usually determined by the use of a mathematical model.



V

Variation Margin - Additional money that must be deposited to bring an account back up to its initial margin. Read more about Variation Margin.

Volatile - A stock or market that is expected to move up or down unexpectedly or drastically is known as a volatile market or stock.

Volatility - A measure of the amount by which an underlying security is expected to fluctuate in a given period of time. Generally measured by the annual standard deviation of the daily price changes in the security, volatility is not equal to the Beta of the stock.

Volume - The number of transactions that took place in a trading day.



W

Write - To short an option. This is the act of creating a new options contract and selling it in the exchange using the Sell To Open order. The person who writes an option is known as the "Writer".
 



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