Investment Terms L-Q

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Large Order Execution (LOX) Procedures: Rules in place at the Chicago Mercantile Exchange that authorize a member firm which receives a large order from an initiating party to solicit counterparty interest off the exchange floor prior to open execution of the order in the pit and that provide for special surveillance procedures. The parties determine a maximum quantity and an "intended execution price." Subsequently, the initiating party's order quantity is exposed to the pit; any bids (or offers) up to and including those at the intended execution price are hit (acceptable). The unexecuted balance is then crossed with the contraside trader found using the LOX procedures. 

Large Traders: A large trader is one who holds or controls a position in any one future or in any one option expiration series of a commodity on any one contract market equaling or exceeding the exchange or CFTC-specified reporting level. 

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

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

Leaps: Long-dated, exchange-traded options. 

Leverage Contract: A contract, standardized as to terms and conditions, for the long-term (ten years or longer) purchase (long leverage contract) or sale (short leverage contract) by a leverage customer of leverage commodity which provides for: (1) participation by the leverage transaction merchant as a principal in each leverage transaction; (2) initial and maintenance margin payments by the leverage customer; (3) periodic payment by the leverage customer or accrual by the leverage transaction merchant to the leverage customer of a variable carrying charge or fee on the initial value of the contract plus any margin deposits made by the leverage customer in connection with a short leverage contract; (4) delivery of a commodity in an amount and form which can be readily purchased and sold in normal commercial or retail channels; (5) delivery of the leverage commodity after satisfaction of the balance due on the contract; and (6) determination of the contract purchase and repurchase, or sale and resale, prices by the leverage transaction merchant. 

Leverage Dealer: See Leverage Transaction Merchant. 

Leverage Transaction Merchant: Any individual, association, partnership, corporation, or trust that is engaged in the business of offering to enter into, entering into, or confirming the execution of leverage contracts, or soliciting or accepting orders for leverage contracts, and who accepts leverage customer funds or extends credit in lieu of those funds. 

Licensed Warehouse: A warehouse approved by exchange from which a commodity may be delivered on a futures contract. See Regular Warehouse.

Life of Contact: 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. See Daily Price Limits. 

Limit Move: A price that has advanced or declined the permissible limit during one trading session, as fixed by the rules of a contract market. 

Limit Only: The definite price stated by a customer to a broker restricting the execution of an order to buy for not more than, or to sell for not less than, the stated price. 

Limit Order: An order in which the customer specifies a price limit or other condition, such as time of an order, as contrasted with a market order which implies that the order should be filled as soon as possible. 

Liquidation: The closing out of a long position. The term is sometimes used to denote closing out a short position, but this is more often referred to as covering. See Cover. 

Liquid Market: A market in which selling and buying can be accomplished with minimal price change. 

Local: A member of a U.S. exchange who trades for his own account and/or fills orders for customers and whose activities provide market liquidity. See Floor Trader. 

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

London Gold Market: Refers to the five dealers who set (fix) the gold price in London: Mocatta & Goldsmid, N. Rothschild & Sons, Johnson Matthey, Sharps Pixley, and Samuel Montagu & Co. 

London Option: A generic term sometimes used to describe options on physical commodities or on futures contracts traded abroad (typified by options on London commodity markets). These options, which often had nothing whatsoever to do with legitimate foreign markets, gained notoriety--prior to their ban in the United States in 1978--because of the sales practices and fraud allegations associated with the American dealers who sold them. 

Long: (1) One who has bought a futures contract to establish a market position; (2) a market position which obligates the holder to take delivery; (3) one who owns an inventory of commodities. See Short. 

Long Hedge: Purchase of futures against the fixed price forward sale of a cash commodity. 

Long the Basis: A person or firm that has bought the spot commodity and hedged with a sale of futures is said to be long the basis. 

Lookback Option: An option whose payoff depends on the minimum or maximum price of the underlying asset during some portion of the life of the option. 

Lot: A unit of trading. See Even Lot, Job Lot, and Round Lot. 

LTM: Leverage Transaction Merchant.

Maintenance Margin: See Margin. 

Managed Account: See Controlled Account and Discretionary Account. 

Margin: The amount of money or collateral deposited by a customer with his broker, by a broker with a clearing member, or by a clearing member with the clearinghouse, for the purpose of insuring the broker or clearinghouse against loss on open futures contracts. The margin is not partial payment on a purchase. (1) Initial margin is the total amount of margin per contract required by the broker when a futures position is opened; (2) Maintenance margin is a sum which must be maintained on deposit at all times. If the equity in a customer's account drops to, or under, the level because of adverse price movement, the broker must issue a margin call to restore the customer's equity. See Variation Margin. 

Margin Call: (1) A request from a brokerage firm to a customer to bring margin deposits up to initial levels; (2) a request by the clearinghouse to a clearing member to make a deposit of original margin, or a daily or intra-day variation payment, because of adverse price movement, based on positions carried by the clearing member. 

Market Correction: In technical analysis, a small reversal in prices following a significant trending period. 

Marketer: See Distributor. 

Market-if-Touched (MIT) Order: An order that becomes a market order when a particular price is reached. A sell MIT is placed above the market; a buy MIT is placed below the market. Also referred to as a board order. 

Market Marker: A professional securities dealer who has an obligation to buy when there is an excess of sell orders and to sell when there is an excess of buy orders. By maintaining an offering price sufficiently higher than their buying price, these firms are compensated for the risk involved in allowing their inventory of securities to act as a buffer against temporary order imbalances. In the commodities industry, this term is sometimes loosely used to refer to a floor trader or local who, in speculating for his own account, provides a market for commercial users of the market. See Specialist System. 

Market-on-Close: An order to buy or sell at the end of the trading session at a price within the closing range of prices. See Stop-Close-Only Order. 

Market-on-Opening: An order to buy or sell at the beginning of the trading session at a price within the opening range of prices. 

Market Order: An order to buy or sell a futures contract at whatever price is obtainable at the time it is entered in the ring or pit. See At-The-Market. 

Mark-to-Market: Daily cash flow system used by U.S. futures exchanges to maintain a minimum level of margin equity for a given futures or option contract position by calculating the gain or loss in each contract position resulting from changes in the price of the futures or option contracts at the end of each trading day. 

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

Maximum Price Fluctuation: See Limit (Up or Down). 

Member Rate: Commission charged for the execution of an order for a person who is a member of the exchange. 

Minimum Price Contract: A hybrid commercial forward contract for agricultural products which includes a provision guaranteeing the person making delivery a minimum price for the product. For agricultural commodities, these contracts became much more common with the introduction of exchange-traded options on futures contracts, which permit buyers to hedge the price risks associated with such contracts. 

Minimum Price Fluctuation: Smallest increment of price movement possible in trading a given contract.

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

Money Market: Short-term debt instruments.

Naked Call: See Naked Option. 

Naked Option: The sale of a call or put option without holding an offsetting position in the underlying commodity. 

Naked Put: See Naked Option. 

National Futures Association (NFA): A self regulatory organization composed of futures commission merchants, commodity pool operators, commodity trading advisors, introducing brokers, leverage transaction merchants, commodity exchanges, commercial firms, and banks, that is responsible--under CFTC oversight--for certain aspects of the regulation of FCMs, CPOs, IBs, LTMs, and their associated persons, focusing primarily on the qualifications and proficiency, financial condition, retail sales practices, and business conduct of these futures professionals. 

Nearbys: The nearest delivery months of a commodity futures market. 

Nearby Delivery Month: The month of the futures contract closest to maturity. 

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. See Carrying Charges and Positive Carry. 

Net Position: The difference between the open long contracts and the open short contracts held by a trader in any one commodity. 

NFA: National Futures Association. 

NOB Spread: Note Against Bond. A futures spread trade involving the buying (selling) of a Treasury note futures contract and the selling (buying) of a Treasury bond futures contract. 

Non-Member Traders: Speculators and hedgers who trade on the exchange through a member but do not hold exchange memberships. 

Nominal Price (or Nominal Quotation): Computed price quotation on futures for a period in which no actual trading took place, usually an average of bid and asked prices. 

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

Notice of Delivery: A notice that must be presented by the seller of a futures contract to the clearinghouse. The clearinghouse then assigns the notice and subsequent delivery instrument to a buyer. Also Notice of Intention to Deliver. 

Notional Amount: The amount (in an interest rate swap, forward rate agreement, or other derivative instrument) or each of the amounts (in a currency swap) to which interest rates are applied (whether or not expressed as a rate or stated on a coupon basis) in order to calculate periodic payment obligations. Also called the notional principal amount, the contract amount, the reference amount, and the currency amount.

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

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. See Cover. 

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

On Track (or Track Country Station): (1) A type of deferred delivery in which the price is set f.o.b. seller's location, and the buyer agrees to pay freight costs to his destination; (2) commodities loaded in railroad cars on track. 

Opening Price (or Range): The price (or price range) recorded during the period designated by the exchange as the official opening. 

Opening, The: The period at the beginning of the trading session officially designated by the exchange during which all transactions are considered made "at the opening." 

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. 

Open Order (or Orders): An order that remains in force until it is canceled or until the futures contracts expire. See Good 'Til Canceled and Good This Week orders. 

Open Outcry: Method of public auction required to make bids and offers in the trading pits or rings of commodity exchanges. 

Option: (1) A commodity option is a unilateral contract which gives the buyer the right to buy or sell a specified quantity of a commodity at a specific price within a specified period of time, regardless of the market price of that commodity. Also see Put and Call; (2) A term sometimes erroneously applied to a futures contract. It may refer to a specific delivery month, as the "July Option." 

Option Buyer: The person who buys calls, puts, or any combination of calls and puts. 

Option Grantor: The person who originates an option contract by promising to perform a certain obligation in return for the price of the option. Also known as Option Writer. 

Original Margin: Term applied to the initial deposit of margin money each clearing member firm is required to make according to clearinghouse rules based upon positions carried, determined separately for customer and proprietary positions; similar in concept to the initial margin or security deposit required of customers by exchange regulations. See Initial Margin. 

Out-of-the-Money: A term used to describe an option that has no intrinsic value. For example, a call at $400 on gold trading at $390 is out-of-the-money 10 dollars. 

Out Trade: A trade which cannot be cleared by a clearinghouse because the trade data submitted by the two clearing members involved in the trade differs in some respect (e.g., price and/or quantity). In such cases, the two clearing members or brokers involved must reconcile the discrepancy, if possible, and resubmit the trade for clearing. If an agreement cannot be reached by the two clearing members or brokers involved, the dispute would be settled by an appropriate exchange committee. 

Overbought: A technical opinion that the market price has risen too steeply and too fast in relation to underlying fundamental factors. Rank and file traders who were bullish and long have turned bearish. 

Overnight Trade: A trade which is not liquidated on the same trading day in which it was established. 

Oversold: A technical opinion that the market price has declined too steeply and too fast in relation to underlying fundamental factors. Rank and file traders who were bearish and short have turned bullish.

P&S (Purchase and Sale Statement): A statement sent by a commission house to a customer when any part of a futures position is offset, showing the number of contracts involved, the prices at which the contracts were bought or sold, the gross profit or loss, the commission charges, the net profit or loss on the transactions, and the balance. 

Paper Profit or Loss: The profit or loss that would be realized if open contracts were liquidated as of a certain time or a certain price. 

Par: (1) 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 the base discounts or premiums for varying quality and delivery locations. (2) In bond markets, an index (usually 100) representing the face value of a bond. 

Path Dependent Option: An option whose valuation and payoff depends on the realized price path of the underlying asset, such as an Asian option or a Lookback option. 

Pay/Collect: A shorthand method of referring to the payment of a loss (pay) and receipt of a gain (collect) by a clearing member to or from a clearing organization that occurs after a futures position has been marked-to-market. See Variation Margin. 

Payment-in-Kind: Refers to an alternative to cash payments to producers of various commodities under the U.S. Department of Agriculture acreage control program authorized by Congress in 1985. The payments consisted of generic certificates which could be exchanged for commodities held in government warehouses or redeemed for equivalent monetary value. 

Pegged Price: The price at which a commodity has been fixed by agreement. 

Pegging: Effecting commodity transactions to prevent a decline in the price of the commodity so that previously written put options will expire worthless, thus protecting premiums previously received. 

Pit: A specially constructed arena on the trading floor of some exchanges where trading in a futures contract is conducted. On other exchanges the term "ring" designates the trading area for a commodity. See Ring. 

Pit Brokers: See Floor Broker. 

Point: A measure of price change equal to 1/100 of one cent in most futures traded in decimal units. In grains, it is of one cent; in T-bonds, it is one percent of par. See Tick. 

Point-and-Figure: A method of charting which uses prices to form patterns of movement without regard to time. It defines a price trend as a continued movement in one direction until a reversal of a predetermined criterion is met. 

Point Balance: A statement prepared by futures commission merchants to show profit or loss on all open contracts by computing them to an official closing or settlement price, usually at calendar month end. 

Pork Bellies: One of the major cuts of the hog carcass that, when cured, becomes bacon. 

Portfolio Insurance: A trading strategy which attempts to alter the nature of price changes in a portfolio to substantially reduce the likelihood of returns below some predetermined level for an established period of time. This can be achieved by moving assets among stocks, cash and fixed-income securities or, with the advent of stock index futures contracts, by hedging a stock-only portfolio by selling stock index futures in a declining market or purchasing futures in a rising market. The objective is to create an exposure similar to that of a stock portfolio with a protective purchased put option. 

Position: An interest in the market, either long or short, in the form of one or more open contracts. Also, "in position" refers to a commodity located where it can readily be moved to another point or delivered on a futures contract. Commodities not so situated are "out of position." Soybeans in Mississippi are out of position for delivery in Chicago, but in position for export shipment from the Gulf. 

Position Limit: The maximum position, either net long or net short, in one commodity future (or option) or in all futures (or options) of one commodity combined which may be held or controlled by one person as prescribed by an exchange and/or by the CFTC. 

Position Trader: A commodity trader who either buys or sells contracts and holds them for an extended period of time, as distinguished from the day trader, who will normally initiate and offset a futures position within a single trading session. 

Positive Carry: The cost of financing a financial instrument (the short-term rate of interest), where the cost is less than the current return of the financial instrument. See also Carrying Charges and Negative Carry. 

Posted Price: An announced or advertised price indicating what a firm will pay for a commodity or the price at which the firm will sell it. 

Prearranged Trading: Trading between brokers in accordance with an expressed or implied agreement or understanding, which is a violation of the Commodity Exchange Act and CFTC regulations. 

Premium: (1) the amount a price would be increased to purchase a better quality commodity; (2) refers to a futures delivery month selling at a higher price than another, as "July is at a premium over May;" (3) cash prices that are above the futures price, such as in foreign exchanges. If the forward rate for Italian lira is at a premium to spot lira, it is selling above the spot price. See Contango, Discount; (4) the money, securities or property the buyer pays to the writer for granting an option contract. 

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 factors. 

Price Manipulation: Any planned operation, transaction or practice calculated to cause or maintain an artificial price. 

Price Movement Limit: See Limit (Up or Down). 

Primary Market: (1) For producers, their major purchaser of commodities; (2) in commercial marketing channels, an important center at which spot commodities are concentrated for shipment to terminal markets; and (3) to processors, the market that is the major supplier of their commodity needs. 

Principals' Market: A market where the ring dealing members act as principals for the transactions they conclude across the ring and with their clients. 

Privileges: See Option. 

Program Trading: The purchase (or sale) of a large number of stocks contained in or comprising a portfolio. Originally called "program" trading when index funds and other institutional investors began to embark on large-scale buying or selling campaigns or "programs" to invest in a manner which replicated a target stock index, the term now also commonly includes computer aided stock market buying or selling programs, portfolio insurance, and index arbitrage. 

Prompt Date: The date on which the buyer of an option will buy or sell the underlying commodity (or futures contract) if the option is exercised. 

Public: In trade parlance, non-professional speculators as distinguished from hedgers and professional speculators or traders. 

Public Elevators: Grain elevators in which bulk storage of grain is provided for the public for a fee. Grain of the same grade but owned by different persons is usually mixed or commingled as opposed to storing it "identity preserved." Some elevators are approved by exchanges as "regular" for delivery on futures contracts.

Purchase and Sale Statement: See P&S. 

Puts: Option contracts which give the holder the right but not the obligation to sell a specified quantity of a particular commodity or other interest at a given price (the "strike price") prior to or on a future date. Also called "put option," they will have a higher (lower) value the lower (higher) the current market value of the underlying article is relative to the strike price. 

Put Option: An option to sell a specified amount of a commodity at an agreed price and time at any time until the expiration of the option. A put option is purchased to protect against a fall in price. The buyer pays a premium to the seller/grantor of this option. The buyer has the right to sell the commodity or enter into a short position in the futures market if the option is exercised. Also see Call Option. 

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

Quick Order: See Fill or Kill Order. 

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

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