Glossary, terms and industry slang

definitions of common industry terms

Arbitrage	The simultaneous purchase and sale of identical or equivalent financial instruments or commodity futures in different markets to profit from price discrepancies.
Ask	The price level of an offer, as in bid-ask spread.
At-the-money	An option with a strike price that is equal (or very close) to the current market price of the underlying asset.
Back Months	Futures delivery months other than the spot or front month (also called deferred months).
Backwardation	A market condition where the price of a futures contract is trading below the expected spot price at contract maturity.
Basis	The difference between the spot (cash) price of a commodity and the price of the nearest futures contract for the same commodity.
Bid	An offer to buy a specific quantity of a commodity at a stated price.
Black-Scholes Model	An option pricing model initially developed by Fischer Black and Myron Scholes for securities options and later refined by Black for options on futures.
Bull Spread	(1) A strategy involving the simultaneous purchase and sale of options of the same class and expiration date but different strike prices. In a bull vertical spread, the purchased option has a higher delta than the option that is sold. For example, in a call bull spread, the purchased option has a lower exercise price than the sold option. Also called bull vertical spread . (2) The simultaneous purchase and sale of two futures contracts in the same or related commodities with the intention of profiting from a rise in prices but at the same time limiting the potential loss if this expectation is wrong. In agricultural commodities, this is accomplished by buying the nearby delivery and selling the deferred.
Butterfly Spread	A three-legged option spread in which each leg has the same expiration date but different strike prices. For example, a butterfly spread in soybean call options might consist of one long call at a $5.50 strike price, two short calls at a $6.00 strike price, and one long call at a $6.50 strike price.
Buy-side	Firms that invest or purchase financial instruments.
Calendar Spread	(1) The purchase of one delivery month of a given futures contract and simultaneous sale of a different delivery month of the same futures contract; (2) the purchase of a put or call option and the simultaneous sale of the same type of option with typically the same strike price but a different expiration date. Also called a horizontal spread or time spread.
Call	(1) An option contract that gives the buyer the right but not the obligation to purchase a commodity or other asset or to enter into a long futures position at a specified price on or prior to a specified expiration date; (2) formerly, a period at the opening and the close of some futures markets in which the price for each futures contract was established by auction; or (3) the requirement that a financial instrument such as a bond be returned to the issuer prior to maturity, with principal and accrued interest paid off upon return. See Buyer's Call, Seller's Call)
CCP (Central CounterParty)	An entity that interposes itself between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer. The CCP assumes and manages the counterparty risk, reducing the risk for market participants and ensuring the performance of open contracts
Clearing house	An agency or separate corporation of a futures exchange responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery, and reporting trading data.
Contango	A market condition where the price of a futures contract is trading above the expected spot price at contract maturity.
Contract	(1) A term of reference describing a unit of trading for a commodity future or option or other derivative; (2) an agreement to buy or sell a specified commodity, detailing the amount and grade of the product and the date on which the contract will mature and become deliverable.
CPO	Commodity Pool Operator. A commodity pool operator manages pooled funds that invest in commodities futures and related securities
CTA	Commodity Trading Advisor. A commodity trading advisor is an individual or organization that, for compensation or profit, advises others, directly or indirectly, as to the value of or the advisability of trading futures contracts, options on futures, retail off-exchange forex contracts or swaps.
Day order	An order that expires automatically at the end of each day's trading session. There may be a day order with time contingency. For example, an 'off at a specific time' order is an order that remains in force until the specified time during the session is reached. At such time, the order is automatically canceled.
DCM	Derivatives Contract Market. Designated contract markets (DCMs) are exchanges that may list for trading futures or option contracts based on all types of commodities and that may allow access to their facilities by all types of traders, including retail customers
DCO	Derivatives Clearing Organization. A derivatives clearing organization (DCO) is an entity that enables each party to an agreement, contract, or transaction to substitute, through novation or otherwise, the credit of the DCO for the credit of the parties; arranges or provides, on a multilateral basis, for the settlement or netting of obligations; or otherwise provides clearing services or arrangements that mutualize or transfer credit risk among participants. Generally speaking, a DCO is another term for a clearing house.
Delta	A calculation of the expected change in an option's price given a one-unit change in the price of the underlying commodity or asset. For example, the price of an option with a delta of 0.5 would be expected to change $0.50 when the underlying commodity or asset’s price moves $1.00.
Derivatives	Financial instruments whose value is derived from the value of underlying assets such as stocks, bonds, commodities, currencies, interest rates, or market indexes.
Diagonal Spread	A spread between two call options or two put options with different strike prices and different expiration dates. See Horizontal Spread, Vertical Spread.
Expiration date	The date on which a future or option contract automatically expires; the last day an option may be exercised.
FCM	A futures commission merchant (FCM) is an entity that solicits or accepts orders to buy or sell futures contracts, options on futures, retail off-exchange forex contracts or swaps, and accepts money or other assets from customers to support such orders.
Fill Or Kill Order (FOK)	An order that demands immediate execution or cancellation. Typically involving a designation, added to an order, instructing the broker to offer or bid (as the case may be) one time only; if the order is not filled immediately, it is then automatically cancelled.
Front Month	The spot or nearby delivery month, the nearest traded contract month. See Back Month.
Futures contract	An agreement to purchase or sell a commodity 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.
Gamma	A measurement of how fast the delta of an option changes, given a unit change in the underlying futures price; the 'delta of the delta.'
Good til Cancel (GTC)	An order which is valid until cancelled by the customer. Unless specified GTC, unfilled orders expire at the end of the trading day. See Open Order.
Hedge	A transaction or position established in one market in an attempt to offset exposure to price fluctuations in some opposite position in another market.
Hedger	A market participant who enters into positions in a futures or other derivatives market opposite to positions held in the cash market to minimize the risk of financial loss from an adverse price change; or who purchases or sells 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).
IB	An introducing broker (IB) is an individual or organization that solicits or accepts orders to buy or sell futures contracts, commodity options, retail off-exchange forex contracts, or swaps but does not accept money or other assets from customers to support these orders.
Iceberg order (hidden quantity)	An order placed on an electronic trading system whereby only a portion of the order is visible to other market participants. As the displayed part of the order is filled, additional quantities become visible. Also called Iceberg, Max Show.
Implied Volatility	The volatility of a futures contract, security, or other instrument as implied by the prices of an option on that instrument, calculated using an options pricing model.
Initial Margin	Initial margin is the amount required by the exchange to initiate a futures position.
In-the-Money	A term used to describe an option contract that has a positive (or intrinsic) value if exercised. A call with a strike price of $1100 on gold trading at $1150 is in-the-money 50 dollars. See Intrinsic Value.
Intrinsic Value	A measure of the value of an option or a warrant if immediately exercised, that is, the extent to which it is in-the-money. The amount by which the current price for the underlying commodity or futures contract is above the strike price of a call option or below the strike price of a put option for the commodity or futures contract.
Leverage	Leverage is the ability to control a large contract value with a relatively small amount of capital. In the futures market, that capital is called performance bond, or initial margin, and is typically 3-12% of a contract's notional or cash value. (CME Group)
Limit order	An order in which the customer specifies a minimum sale price or maximum purchase price, as contrasted with a market order, which implies that the order should be filled as soon as possible at the market price.
Liquidity (liquid market)	A market in which selling and buying can be accomplished with minimal effect on price.
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, Offset.
Long	(1) One who has bought a futures contract to establish a market position; (2) a market position that obligates the holder to take delivery; (3) one who owns an inventory of commodities. See Short.
Lot	A unit of trading. See Even Lot, Job Lot, and Round Lot.
Maintenance margin	Maintenance margin is an amount that must be maintained on deposit at all times.
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 a clearing organization. The margin is not partial payment on a purchase. Also called Performance Bond. (1) Initial margin is the amount of margin required by the broker when a futures position is opened; (2) Maintenance margin is an amount that must be maintained on deposit at all times. If the equity in a customer's account drops to or below the level of maintenance margin because of adverse price movement, the broker must issue a margin call to restore the customer's equity to the initial level. See Variation Margin. Exchanges specify levels of initial margin and maintenance margin for each futures contract, but futures commission merchants may require their customers to post margin at higher levels than those specified by the exchange. Futures margin is determined by the SPAN margining system, which takes into account all positions in a customer's portfolio.
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 clearing organization to a clearing member to make a deposit of original margin, or a daily or intra-day variation margin payment because of adverse price movement, based on positions carried by the clearing member.
Mark-to-Market	Part of the 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 session. These amounts are added or subtracted to each account balance.
Market Order	An order to buy or sell a futures contract at whatever price is obtainable at the time it is entered in the order book, ring, pit, or other trading platform.
Notional value	Contract notional value, also known as contract value, is the financial expression of the contract unit and the current futures contract price. The notional value of the contract is calculated by multiplying the contract unit by the futures price.
Offer	An indication of willingness to sell at a given price; opposite of bid, the price level of the offer may be referred to as the ask.
One Cancels the Other Order Type (OCO)	A pair of orders, typically limit orders, whereby if one order is filled, the other order will automatically be cancelled. For example, an OCO order might consist of an order to buy 10 calls with a strike price of 50 at a specified price or buy 20 calls with a strike price of 55 (with the same expiration date) at a specified price.
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.
Option	A contract that gives the buyer the right, but not the obligation, to buy or sell a specified quantity of a commodity or other instrument at a specific price within a specified period of time, regardless of the market price of that instrument. Also see Put and Call.
Open Trade Equity	The unrealized gain or loss on open futures positions.
Out-of-the-Money	A term used to describe an option that has no intrinsic value. For example, a call with a strike price of $400 on gold trading at $390 is out-of-the-money 10 dollars.
Premium	(1) The payment an option buyer makes to the option writer for granting an option contract; (2) the amount a price would be increased to purchase a better quality commodity; (3) refers to a futures delivery month selling at a higher price than another, as 'July is at a premium over May' Price Banding: A CME Group and ICE-instituted mechanism to ensure a fair and orderly market on an electronic trading platform. This mechanism subjects all incoming orders to price verification and rejects all orders with clearly erroneous prices. Price bands are monitored throughout the day and adjusted if necessary.
Put	An option contract that gives the holder the right but not the obligation to sell a specified quantity of a particular commodity, security, or other asset or to enter into a short futures position at a given price (the strike price) prior to or on or prior to a specified expiration date.
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. Ratio spreads are typically designed to be delta neutral. Back spreads and front spreads are types of ratio spreads.
Rollover	Rollover is when a trader moves his position from the front month contract to a another contract further in the future. Traders will determine when they need to move to the new contract by watching volume of both the expiring contract and next month contract. A trader who is going to roll their positions may choose to switch to the next month contract when volume has reached a certain level in that contract.
Sector	Futures products are generally separated into six different sectors, including energy futures, metals futures, agricultural futures, equity index futures, foreign currency futures, and interest rate futures. (not CFTC or CME)
Sell-side	Firms or businesses involved in the creation, marketing, and sale of financial instruments.
Settlement Price	The daily price at which the clearing organization 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.
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. Also, the sale of a futures contract that is not owned by the seller at the time of the trade.
Short Selling	Selling a futures contract or other instrument with the idea of delivering on it or offsetting it at a later date.
Speculator	In commodity futures, a trader who does not hedge, but who trades with the objective of achieving profits through the successful anticipation of price movements.
Spot Month	The futures contract that matures and becomes deliverable during the present month. Also called Current Delivery Month.
Spot Price	The price at which a commodity is selling for immediate delivery.
Spread	The bid-ask spread is the number of ticks that separate the highest bid from the lowest offer. A spread is also a trade in which one futures contract is simultaneously bought while another is sold. Intramarket (calendar) spreads Intermarket spreads Commodity product spreads
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. Compare to market-if-touched order.
Strangle	An option position consisting of the purchase of put and call options having the same expiration date, but different strike prices.
Strike Price	The price, specified in the option contract, at which the underlying futures contract, security, or commodity will move from seller to buyer.
Theta	The Greek that measures an option’s sensitivity to time is theta.
Tick	Refers to a minimum change in price up or down. An up-tick means that the last trade was at a higher price than the one preceding it. A down-tick means that the last price was lower than the one preceding it. See Minimum Price Fluctuation.
Time Spread	The selling of a nearby option and buying of a more deferred option with the same strike price. Also called Horizontal Spread.
Variation Margin	The daily adjustment of profits and losses on open futures positions. Variation margin is calculated based on the daily settlement price of the futures contract being held and paid or received into the account on a daily basis upon daily settlement and the marking-to-market process.
Vega	Coefficient measuring the sensitivity of an option value to a change in volatility.
Volatility	A measurement of the change in price over a given period. It is often expressed as a percentage and computed as the annualized standard deviation of daily change in price.
Volume	the number of contracts traded in a given underlying over a given timeframe.