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Rally: An upward movement of prices. Same as Recovery.
Random Walk: An economic theory that price movements in the commodity futures markets and in the securities markets are completely random in character (i.e., past prices are not a reliable indicator of future prices).
Range: The difference between the high and low price of a commodity during a given period.
Ratio Hedge: The number of options compared to the number of futures contracts bought or sold in order to establish a hedge that is risk neutral.
Ratio Spread: This strategy, which applies to both puts and calls, involves buying or selling options at one strike price in greater number than those bought or sold at another strike price.
Reaction: The downward price movement tendency of a commodity after a price advance.
Recovery: An upward price movement after a decline. Same as Rally.
Regular Warehouse: A processing plant or warehouse that satisfies exchange requirements for financing, facilities, capacity, and location and has been approved as acceptable for delivery of commodities against futures contracts. See Licensed Warehouse.
Replicating Portfolio: A portfolio of assets for which changes in value match those of a target asset. For example, a portfolio replicating a standard option can be constructed with certain amounts of the asset underlying the option and bonds. Sometimes referred to as a Synthetic Asset.
Reporting Level: Sizes of positions set by the exchanges and/or the CFTC at or above which commodity traders or brokers who carry these accounts must make daily reports about the size of the position by commodity, by delivery month, and whether the position is controlled by a commercial or non-commercial trader.
Resistance: In technical trading, a price area where new selling will emerge to dampen a continued rise. Also see Support.
Resting Order: An order to buy at a price below or to sell at a price above the prevailing market that is being held by a floor broker. Such orders may either be day orders or open orders.
Retender: In specific circumstances, some contract markets permit holders of futures contracts who have received a delivery notice through the clearing house to sell a futures contract and return the notice to the clearinghouse to be reissued to another long; others permit transfer of notices to another buyer. In either case, the trader is said to have retendered the notice.
Retracement: A reversal within a major price trend.
Reversal: A change of direction in prices.
Reverse Conversion: With regard to options, a position created by buying a call option, selling a put option, and selling the underlying futures contract.
Riding the Yield Curve: Trading in an interest rate futures according to the expectations of change in the yield curve.
Ring: A circular area on the trading floor of an exchange where traders and brokers stand while executing futures trades. Some exchanges use pits rather than rings. See Pit.
Risk Factor: See Delta Value.
Risk/Reward Ratio: The relationship between the probability of loss and profit. This ratio is often used as a basis for trade selection or comparison.
Roll-Over: A trading procedure involving the shift of one month of a straddle into another future month while holding the other contract month. The shift can take place in either the long or short straddle month. The term also applies to lifting a near futures position and re-establishing it in a more deferred delivery month.
Round Lot: A quantity of a commodity equal in size to the corresponding futures contract for the commodity. See Even Lot.
Round Turn: A completed transaction involving both a purchase and a liquidating sale, or a sale followed by a covering purchase.
Rules: The principles for governing an exchange. In some exchanges, rules are adopted by a vote of the membership, while regulations can be imposed by the governing board.
Sample Grade: In commodities, usually the lowest quality of a commodity, too low to be acceptable for delivery in satisfaction of futures contracts.
Scale Down (or Up): To purchase or sell a scale down means to buy or sell at regular price intervals in a declining market. To buy or sell on scale up means to buy or sell at regular price intervals as the market advances.
Scalper: A speculator on the trading floor of an exchange who buys and sells rapidly, with small profits or losses, holding his positions for only a short time during a trading session. Typically, a scalper will stand ready to buy at a fraction below the last transaction price and to sell at a fraction above, thus creating market liquidity.
Scalping: The practice of trading in and out of the market on very small price fluctuations. A person who engages in this practice is known as a scalper.
Security Deposit: See Margin.
Seller's Call: See Call.
Seller's Market: A condition of the market in which there is a scarcity of goods available and hence sellers can obtain better conditions of sale or higher prices. Also see Buyer's Market.
Seller's Option: The right of a seller to select, within the limits prescribed by a contract, the quality of the commodity delivered and the time and place of delivery.
Selling Hedge (or Short Hedge): Selling futures contracts to protect against possible decreased prices of commodities. Also see Hedging.
Series (of Options): Options of the same type (i.e., either puts or calls, but not both), covering the same underlying futures contract or physical commodity, having the same strike price and expiration date.
Settlement: The act of fulfilling the delivery requirements of the futures contract.
Settlement or Settling Price: The daily price at which the clearing house clears all trades and settles all accounts between clearing members of each contract month. Settlement prices are used to determine both margin calls and invoice prices for deliveries. The term also refers to a price established by the exchange to even up positions which may not be able to be liquidated in regular trading.
Sharpe Ratio: A measurement of trading performance calculated as the average return divided by the variance of those returns; named after William P. Sharpe.
Shipping Certificate: A negotiable instrument used by several futures exchanges as the futures delivery instrument for several commodities (e.g., soybean meal, plywood, and white wheat). The shipping certificate is issued by exchange-approved facilities and represents a commitment by the facility to deliver the commodity to the holder of the certificate under the terms specified therein. Unlike an issuer of a warehouse receipt who has physical product in store, the issuer of a shipping certificate may honor its obligation from current production or through-put as well as from inventories.
Shock Absorber: A temporary restriction in the trading of stock index futures which becomes effective following a significant intraday decrease in stock index futures prices. Designed to provide an adjustment period to digest new market information, the restriction bars trading below a specified price level. Shock Absorbers are generally market specific and at tighter levels than circuit breakers.
Short: (1) The selling side of an open futures contract; (2) a trader whose net position in the futures market shows an excess of open sales over open purchases. See Long.
Short Covering: See Cover.
Short Hedge: See Selling Hedge.
Short Selling: Selling a futures contract with the idea of delivering on it or offsetting it at a later date.
Short Squeeze: See Squeeze.
Short the Basis: The purchase of futures as a hedge against a commitment to sell in the cash or spot markets. See Hedging.
Small Traders: Traders who hold or control positions in futures or options that are below the reporting level specified by the exchange or the CFTC.
Soft: A description of a price which is gradually weakening. Also refers to commodities such as sugar, cocoa, and coffee.
Soften: The process of a slowly declining market price.
Sold-Out-Market: When liquidation of a weakly-held position has been completed, and offerings become scarce, the market is said to be sold out.
Specialist System: A type of trading commonly used for the exchange trading of securities in which one individual or firm acts as a market-maker in a particular security, with the obligation to see that trading in that security is fair and orderly by offsetting temporary imbalances in supply and demand by trading for his own account. Also see Board Broker System and Free Crowd System.
Speculative Bubble: A rapid, but usually short-lived, run-up in prices caused by excessive buying which is unrelated to any of the basic, underlying factors affecting the supply or demand for the commodity. Speculative bubbles are usually associated with a "bandwagon" effect in which speculators rush to buy the commodity (in the case of futures, "to take positions") before the price trend ends, and an even greater rush to sell the commodity (unwind positions) when prices reverse.
Speculative Limit: See Position Limit.
Speculative Position Limit: See Position Limit.
Speculator: In commodity futures, an individual who does not hedge, but who trades with the objective of achieving profits through the successful anticipation of price movements.
Split Close: Term which refers to price differences in transactions at the close of any market session.
Spot: Market of immediate delivery of the product and immediate payment. Also refers to a maturing delivery month of a futures contract.
Spot Commodity: (1) The actual commodity as distinguished from a futures contract: (2) sometimes used to refer to cash commodities available for immediate delivery. Also see Actuals or Cash Commodity.
Spot Month: See Current Delivery Month.
Spot Price: The price at which a physical commodity for immediate delivery is selling at a given time and place. See Cash Price.
Spread (or Straddle): The purchase of one futures delivery month against the sale of another futures delivery month of the same commodity; the purchase of one delivery month of one commodity against the sale of that same delivery month of a different commodity; or the purchase of one commodity in one market against the sale of the commodity in another market, to take advantage of a profit from a change in price relationships. See also Arbitrage, Switch. The term spread is also used to refer to the difference between the price of a futures month and the price of another month of the same commodity. A spread can also apply to options.
Squeeze: A market situation in which the lack of supplies tends to force shorts to cover their positions by offset at higher prices.
SRO: See Designated Self-Regulatory Organization.
Standby Commitment: A put option in Ginnie Mae trading which gives the holder the right, but not the obligation, to make delivery.
Stop-Close-Only Order: A stop order which can only be executed, if possible, during the closing period of the market. See also Market-on-Close Order.
Stop Limit Order: A stop limit order is an order that goes into force as soon as there is a trade at the specified price. The order, however, can only be filled at the stop limit price or better.
Stop Order: This is an order that becomes a market order when a particular price level is reached. A sell stop is placed below the market, a buy stop is placed above the market. Sometimes referred to as Stop Loss Order.
Straddle: See Spread.
Strangle: An option position consisting of the purchase or sale of put and call options having the same expiration but different strike prices.
Street Book: A daily record kept by futures commission merchants and clearing members showing details of each futures transaction, including date, price, quantity, market, commodity, future, and the person for whom the trade was made.
Striking Price (Exercise or Contract Price): The price, specified in the option contract, at which the underlying futures contract or commodity will move from seller to buyer.
STRIPS: Separate Trading of Registered Interest and Principal Securities. A book-entry system operated by the Federal Reserve permitting separate trading and ownership of the principal and coupon portions of selected Treasury securities. It allows the creation of zero coupon Treasury securities from designated whole bonds.
Strong Hands: When used in connection with delivery of commodities on futures contracts, the term usually means that the party receiving the delivery notice probably will take delivery and retain ownership of the commodity; when used in connection with futures positions, the term usually means positions held by trade interests or well-financed speculators.
Support: In technical analysis, a price area where new buying is likely to come in and stem any decline. Also see Resistance.
Swap: 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. In securities, this may entail selling one issue and buying another in foreign currency, it may entail buying a currency on the spot market and simultaneously selling it forward. Swaps may also involve exchanging income flows; for example, exchanging the fixed rate coupon stream of a bond for a variable rate payment stream, or vice versa, while not swapping the principal component of the bond.
Swaption: An option to enter into a swap -- i.e., the right, but not the obligation, to enter into a specified type of swap at a specified future date.
Switch: Offsetting a position in one delivery month of a commodity and simultaneous initiation of a similar position in another delivery month of the same commodity, a tactic referred to as "rolling forward." See Arbitrage.
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 is created by combining a long put and a short call with the same expiration date and the same strike price.
Systemic Risk: Market risk due to price fluctuations which cannot be eliminated by diversification.
Taker: The buyer of an option contract.
T-Bond: See Treasury Bond.
Technical Analysis: An approach to forecasting commodity prices which examines patterns of price change, rates of change, and changes in volume of trading and open interest, without regard to underlying fundamental market factors.
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 clearinghouse of the intention to initiate delivery of the physical commodity in satisfaction of the futures contract. Also see Retender.
Tenderable Grades: See Contract Grades.
Terminal Elevator: An elevator located at a point of greatest accumulation in the movement of agricultural products which stores the commodity or moves it to processors.
Terminal Market: Usually synonymous with commodity exchange or futures market, specifically in the United Kingdom.
Theta: The derivative of the option price equation with respect to the remaining time to expiration of the option. A measure of the sensitivity of the value of the option to the passage of time.
Tick: Refers to a minimum change in price up or down. See Point.
Time-of-Day Order: This is an order which is to be executed at a given minute in the session. For example, "Sell 10 March corn at 12:30 p.m."
Time Spread: The selling of a nearby option and buying of a more deferred option with the same strike price.
Time Value: That portion of an option's premium that exceeds the intrinsic value. The time value of an option reflects the probability that the option will move into-the-money. Therefore, the longer the time remaining until expiration of the option, the greater its time value. Also called Extrinsic Value.
To-Arrive Contract: A transaction providing for subsequent delivery within a stipulated time limit of a specific grade of a commodity.
Trade Option: A commodity option transaction in which the taker is reasonably believed by the writer to be engaged in business involving use of that commodity or a related commodity.
Trader: (1) A merchant involved in cash commodities; (2) a professional speculator who trades for his own account.
Transaction: The entry or liquidation of a trade.
Transfer Trades: Entries made upon the books of futures commission merchants for the purpose of: (1) transferring existing trades from one account to another within the same office where no change in ownership is involved; (2) transferring existing trades from the books of one commission merchant to the books of another commission merchant where no change in ownership is involved. Also called Ex-Pit Transactions.
Transferable Option (or Contract): A contract which permits a position in the option market to be offset by a transaction on the opposite side of the market in the same contract.
Transfer Notice: A term used on some exchanges to describe a notice of delivery. See Retender.
Treasury Bills: Short-term U.S. government obligations, generally issued with 13, 26 or 52-week maturities.
Treasury Bonds (or T-Bond): Long-term obligations of the U.S. government which pay interest semiannually until they mature or are called, at which time the principal and the final interest payment is paid to the investor.
Treasury Notes: Same as Treasury Bonds except that Treasury Notes are medium-term and not callable.
Trend: The general direction, either upward or downward, in which prices have been moving.
Trendline: In charting, a line drawn across the bottom or top of a price chart indicating the direction or trend of price movement. If up, the trendline is called bullish; if down, it is called bearish.
Underlying Commodity: The commodity or futures contract on which a commodity option is based, and which must be accepted or delivered if the option is exercised. Also, the cash commodity underlying a futures contract.
Variable Price Limit: A price limit schedule, determined by an exchange, that permits variations above or below the normally allowable price movement for any one trading day.
Variation Margin: Payment made on a daily or intraday basis by a clearing member to the clearing organization based on adverse price movement in positions carried by the clearing member, calculated separately for customer and proprietary positions.
Vault Receipt: A document indicating ownership of a commodity stored in a bank or other depository and frequently used as a delivery instrument in precious metal futures contracts.
Visible Supply: Usually refers to supplies of a commodity in licensed warehouses. Often includes afloats and all other supplies "in sight" in producing areas.
Volatility Quote Trading: Refers to the quoting of bids and offers on option contracts in terms of their implied volatilities rather than as prices.
Volume of Trade: The number of contracts traded during a specified period of time. It may be quoted as the number of contracts traded or in the total of physical units, such as bales or bushels, pounds or dozens.
Warehouse Receipt: A document certifying possession of a commodity in a licensed warehouse that is recognized for delivery purposes by a commodity futures exchange.
Warrant: An issuer-based product that gives the buyer the right, but not the obligation, to buy (in the case of a call) or to sell (in the case of a put) a stock or a commodity at a set price during a specified period.
Warrant or Warehouse Receipt for Metals: Certificate of physical deposit, which gives title to physical metal in an exchange approved warehouse.
Wash Sale: Transactions that give the appearance of purchases and sales but which are initiated without the intent to make a bona fide transaction and which generally do not result in any actual change in ownership. Such sales are prohibited by the Commodity Exchange Act.
Wash Trading: Entering into, or purporting to enter into, transactions to give the appearance that purchases and sales have been made, without resulting in a change in the trader's market position.
Weak Hands: When used in connection with delivery of commodities on futures contracts, the terms usually means that the party probably does not intend to retain ownership of the commodity; when used in connection with futures positions, the term usually means positions held by small speculators.
Wild Card Option: Refers to a provision of any physical delivery Treasury Bond or Note futures contract which permits shorts to wait until as late as 8:00 p.m. on any notice day to announce their intention to deliver at invoice prices that are fixed at 2:00 p.m., the close of futures trading, on that day.
Winter Wheat: Wheat that is planted in the fall, lies dormant during the winter, and is harvested beginning about May of the next year.
Writer: The issuer, grantor, or maker of an option contract.
Yield Curve: A graphic representation of market yield for a fixed income security plotted against the maturity of the security.