Appendix GLOSSARY

This glossary was compiled by CME from a number of sources. The definitions are not intended to state or
suggest the correct legal significance of any word or phrase. The sole purpose of this compilation is to
foster a better understanding of futures and options on futures.

Abandon — To let the expiration date for an option Bullish key reversal — A chart formation that signals
pass without exercising or offsetting the option (same a reversal of the current downward trend and the
as Expire). possible beginning of an uptrend

American style options — Options that permit exercise Buy on close — To buy at the end of a trading session
at any time on or before the expiration date. at a price within the closing range.

Arbitrage — The simultaneous purchase or sale of Buy on opening — To buy at the beginning of a
identical or equivalent financial instruments or commodity trading session at a price within the opening range.
futures in order to benefit from a discrepancy in their
price relationship. Call — An option to buy a commodity, security or
futures contract at a specified price any time between
Ask — The price that the market participants are willing now and the expiration date of the option contract.
to sell a futures contract (same as Offer) See Option.

Associated Person — A person, also called a Cash commodity — The actual physical commodity as
commodity broker, associated with soliciting customers distinguished from a futures contract.
and orders for a Futures Commission Merchant or
Introducing Broker. An AP must pass a Series 3 Chartist — One who engages in technical analysis.
examination, be licensed by the Commodity Futures Clearing house — An adjunct to a futures exchange
Trading Commission and be a member of the National responsible for settling trading accounts, clearing
Futures Association. trades, collecting and maintaining performance bond
At-the-money — An option whose strike price is funds from the brokerage firms that are members of
currently equal to the underlying futures price. the clearing house, regulating delivery and reporting
trading data (such as open interest and volume).
Back months — The futures or options on futures
months being traded that are furthest from expiration. Close — The period at the end of the trading session.
Also called deferred or distant months. Sometimes used to refer to the closing range.

Bar chart — A graph of prices for a period of time, Closing range — The high and low prices, or bids and
used to identify price trends. A bar chart is drawn by offers, recorded during the period designated as the
drawing a vertical line to reflect the highest and lowest official close. See Settlement price.
prices traded during the specified period of time. Commission — The one-time fee charged by a broker
Bear — One who believes prices will move lower. to a customer when a futures or options on futures
position is liquidated either by offset or delivery. Also
Bear market — A market in which prices are declining. called round turn.

Bearish key reversal — A chart formation that signals a CFTC — Abbreviation for the Commodity Futures
reversal of the current upward trend and the possible Trading Commission, as created by the Commodity
beginning of a downtrend. Futures Trading Commission Act of 1974. This
government agency currently regulates the nation’s
Bid — The price that the market participants are commodity futures industry.
willing to pay.
Contract — Unit of trading for a financial or commodity
Bull — One who expects prices to rise. future. Also, actual bilateral agreement between the
Bull market — A market in which prices are rising. parties (buyer and seller) of a futures or options on
futures transaction as defined by an exchange.

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Contract month — The month in which futures contracts Fundamentalist — One who engages in fundamental
may be satisfied by making or accepting delivery. Also analysis.
called the delivery month.
Futures — A term used to designate all contracts
Day order — An order that is placed for execution covering the purchase and sale of financial instruments
during only one trading session. If the order cannot be or physical commodities for future delivery on a
executed that day, it is automatically canceled. commodity futures exchange.

Day trading — Refers to establishing and liquidating Futures Commission Merchant (FCM) — A firm or
the same position or positions within one day’s trading, person engaged in soliciting or accepting and handling
thus ending the day with no established position in the orders for the purchase or sale of futures contracts,
market. subject to the rules of a futures exchange and, who, in
connection with solicitation or acceptance of orders,
Deferred — See Back months. accepts any money or securities to margin any resulting
Delivery — The tender and receipt of an actual trades or contracts. The FCM must be licensed by the
commodity or financial instrument, or cash in CFTC.
settlement of a futures contract. Futures contract — A standardized agreement, traded
Delivery month — See Contract month. on a commodity exchange, to buy or sell a commodity
at a date in the future. Specifies the commodity, quality,
Distant — See Back months. quantity, delivery date and delivery point or cash
settlement.
Downtrend — A price trend characterized by a series
of lower highs and lower lows. GLOBEX — Registered term that describes CME’s
global electronic trading platform
Electronic trading — Computerized system for placing
orders, bid and offer posting, and trade execution. Head and shoulders — A sideways price formation at
GLOBEX is an example of an electronic trading system. the top or bottom of the market that indicates a major
market reversal.
Electronic trading — Computerized system for placing
orders, bid and offer posting, and trade execution. Hedge — The purchase or sale of a futures contract as
The GLOBEX platform is an example of an electronic a temporary substitute for a cash market transaction to
trading system. be made at a later date. Usually it involves opposite
positions in the cash market and futures market at the
Elliott Wave theory — A version of technical analysis same time. See Long hedge and Short hedge.
that studies price wave sequences.
Holder — One who purchases an option.
Exercise — The process of exchanging an option for
the underlying futures contract. In-the-money — A call option whose strike price is
lower than the current underlying futures price. A put
Exercise price — The price at which the holder (buyer) option whose strike price is higher than the current
may purchase or sell the underlying futures contract underlying futures price.
upon the expiration of an option. Also called strike price.
Initial performance bond — The funds required when a
Expiration date — The last day that an option may be futures position (or a short options on futures position)
exercised into the underlying futures contract. Also, the is opened. Previously referred to as initial margin.
last day of trading for a futures contract.
Intercommodity spread — A spread trade involving
Floor broker — An exchange member who is paid a different but related commodities, usually the same
fee for executing orders for clearing members or their month. See Spread trade.
customers. A floor broker executing orders must be
licensed by the CFTC. Interdelivery spread — A spread trade involving
different delivery months of the same commodity.
Floor trader — An exchange member who generally See Spread trade.
trades only his or her own account or for an account
controlled by him or her. Also referred to as a local. Intermarket spread — A spread trade involving same
or related commodities at different exchanges.
Forward contract — A private agreement between See Spread trade.
buyer and seller for the future delivery of a commodity
at an agreed price. Intrinsic value — The relationship of an option’s in-the-
money strike price to the current futures price.
Fundamental analysis — The study of supply and
demand information to help project futures prices.

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Limit order — An order given to a broker by a customer Opening price — The range of prices at which the first
that specifies a price. The order can be executed only if bids and offers were made or first transactions were
the market reaches or betters that price. completed.

Limit price — See Maximum price fluctuation. Open interest — Total number of futures or options on
futures contracts that have not yet been offset or
Liquidation — Any transaction that offsets or closes out fulfilled for delivery.
a long or short futures position.
Open order — An order to a broker that is good until
Long — One who has bought a futures or options on it is canceled or executed.
futures contract to establish a market position through
an offsetting sale. The opposite of Short. Open outcry — The trading method used on a trading
floor at a futures exchange. In open outcry, only the
Long hedge — The purchase of a futures contract in highest Bid and lowest Offer prices can compete (that
anticipation of an actual purchase in the cash market. is, be shouted by the floor brokers and floor traders) on
Used by processors or exporters as protection against the trading floor at any given moment.
an advance in the cash price. See Hedge.
Option — The right, but not the obligation, to sell or
Margin — See Performance bond. buy a futures contract at a specified price within a
Maintenance performance bond — A sum, usually specified time.
smaller than, but not part of, the initial performance Option assignment — When a short option position is
bond, which must be maintained on deposit in the exercised and the option writer receives a short futures
customer’s account at all times. Previously referred to position (if the trader was short a call) or a long futures
as maintenance margin. position (if the trader was short a put) at the option
Mark-to-market — The daily adjustment of traders’ strike price.
performance bond accounts to reflect the value of open Out-of-the-money — An option with no intrinsic value.
positions; determined by comparing the price of an
open position against the closing price of the futures Out-trades — A situation that results when there is some
contract, and then debiting or crediting the traders’ confusion or error on a trade — for example, when
accounts accordingly. both traders think they were buying.

Market order — An order for immediate execution given Overbought — A technical opinion of a market which
to a broker to buy or sell at the best obtainable price. has risen too high in relation to underlying fundamental
factors.
Maximum price fluctuation — The maximum amount
the contract price can change up or down during one Oversold — A technical opinion of a market which has
trading session, as stipulated by Exchange rules. fallen too low in relation to underlying fundamental
factors.
Minimum price fluctuation — The smallest increment
of price movement possible in trading a given contract, Performance bond — Funds that must be deposited
often referred to as a tick. by a customer with his or her broker, by a broker with
a clearing member or by a clearing member with the
M.I.T. — An abbreviation for market-if-touched. A price Clearing House. The performance bond helps to ensure
order that automatically becomes a market order if the the financial integrity of brokers, clearing members and
price is reached. the Exchange as a whole. Previously referred to as
National Futures Association (NFA) — The self- margin.
regulatory organization of the futures industry. Chartered Performance bond call — A demand for additional
by Congress in 1981, the NFA regulates the activities of funds to bring the customer’s account up to the
its member brokerage firms and their employees. maintenance performance bond level because of adverse
Nearby — The nearest active trading month of a futures price movement. Formerly referred to as a margin call.
or options on futures contract. Also referred to as the See Maintenance performance bond.
lead month. Position — An interest in the market, either long or short,
Offer — Indicates a willingness to sell a futures contract in the form of open contracts. See Open interest.
at a given price. Premium — The excess of one futures contract price
Offset — Selling if one has bought, or buying if one over that of another or over the cash market price. Also,
has sold, a futures or options on futures contract. the amount agreed upon between the buyer and seller
for the purchase or sale of a futures option — the buyer
Opening — The period at the beginning of the trading pays the premium and the seller receives the premium.
session during which all transactions are considered
made or first transactions were completed.

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Put — An option to sell a commodity, security or Spot market — A market in which commodities (cattle,
futures contract at a specified price at any time currencies, stocks, etc.) are bought and sold for cash
between now and the expiration of the option contract. and delivered immediately. Also known as a physical
See Option. market.

Rally — An upward movement of prices following a Spread — The price difference between two contracts.
decline. The opposite of a reaction.
Spread trade — The simultaneous purchase and sale of
Range — The high and low prices or high and low bids futures contracts for the same commodity or instrument
and offers recorded during a specified time. for delivery in different months or in different but related
markets. A spreader is not concerned with the direction
Reaction — A decline in prices following an advance. in which the market moves, but only with the difference
The opposite of a rally. between the prices of each contract.
Registered Representative — A person employed by, Stop order — An order to buy or sell at the market
and soliciting business for, a commission house or when and if a specified price is reached.
futures commission merchant.
Strike price — See Exercise price.
Resistance line — A price level at which there is enough
sell pressure to keep prices from rising above that Symmetrical triangles — A price formation that can
particular price level. either signal a reversal or a continuation of price
movement.
Round-turn — Procedure by which a long or short
position is offset by an opposite transaction or by Technical analysis — The study of historical price
accepting or making delivery of the actual financial patterns to help project futures prices.
instrument or physical commodity.
Tick — Refers to a change in price, either up or down.
Scalp — To trade for small gains. Scalping normally See Minimum price fluctuation.
involves establishing and liquidating a position quickly,
usually within the same day, hour or even just a few Time value — The amount by which an option’s
minutes. premium exceeds the intrinsic value of the option.
Usually relative to the time remaining before the option
Settlement price — A figure determined by the closing expires.
range that is used to calculate gains and losses in
futures market accounts, performance bond calls and Trend — The general direction of the market.
invoice prices for deliveries. See Closing range. Uptrend — A price trend characterized by a series of
Short — One who has sold a futures contract to higher highs and higher lows.
establish a market position and who has not yet closed Volume — The number of contracts traded during a
out this position through an offsetting procedure. The specified period of time.
opposite of long.
Writer — An individual who sells an option.
Short hedge — The sale of a futures contract in
anticipation of a later cash market sale. Used to
eliminate or lessen the possible decline in value of
ownership of an approximately equal amount of the
cash financial instrument or physical commodity. See
Hedge.

Side-by-side trading — The simultaneous trading of

the same futures contract on both a trading floor (via
open outcry) and an electronic trading platform.

Speculator — One who attempts to anticipate price

changes and, through buying and selling futures
contracts, aims to make profits. Does not use the
futures market in connection with the production,
processing, marketing or handling of a product. The
speculator has no interest in taking delivery.

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