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Risk Management Terms
Account Executive
The agent of a commission house who serves customers/traders by entering their commodity futures and options orders, reporting trade executions, advising on trading strategies, etc.
Active Month
In the metals markets, the nearest base contract month that is not the current delivery month. The base months for each metals futures are defined by each individual contract.
Actuals
Physical cash commodities as opposed to futures contracts.
ADP
Alternative Delivery Procedure. A provision of a futures contract that allows buyers and sellers to make and take delivery under terms or conditions that differ from those prescribed in the contract. An ADP may occur at any time during the delivery period, once long and
short futures positions have been matched for the purpose of delivery.
Administrative Workstation
A NYMEX ACCESS® workstation through which Exchange clearing members monitor all activity in accounts they carry and set limits on their customers' accounts through the Trade Limit Monitoring System.
AGA
American Gas Association. Major natural gas industry trade association, based in Alexandria, Virginia. AGA conducts technical research and helps create standards for equipment and products involved in every facet of the natural gas industry. It also compiles statistics
which are considered industry standards.
All or None
An order which must be filled in its entirety or not at all.
American Option
An option contract that may be exercised at any time prior to expiration. This differs from a "European option," which may only be exercised on the expiration date. The Exchange options contracts are "American."
API
American Petroleum Institute. The primary U.S. oil industry trade association, based in Washington, D.C. API conducts research and sets technical standards for industry equipment and products from wellhead to retail outlet. It also compiles statistics which are regarded as
industry benchmarks.
Arbitrage
The simultaneous purchase of one commodity against the sale of another in order to profit from fluctuations in the usual price relationships. Variations include the simultaneous purchase and sale of different delivery months of the same
commodity; of the same delivery month, but different grades of the same commodity; and of different commodities.
Ask
A motion to sell. The same as offer.
Assignment
The process by which the seller of an option is notified of a buyer's intention to exercise the rights associated with the option.
At-the-Market
An order to buy or sell a futures contract at whatever price is obtainable when the order reaches the trading floor. Also called a market order.
At-the-Money
An option whose exercise, or strike, price is closest to the futures price.
Automatic Exercise
Following options expiration, an option which is in-the-money by $100 or more is exercised automatically by the clearinghouse, unless the holder of the option submits specific instructions to the contrary.
Backwardation
Market situation in which futures prices are lower in each succeeding delivery month. Also known as an inverted market. The opposite of contango.
Banker's Acceptance
A draft or bill of exchange accepted by a bank; payment is guaranteed by the accepting institution.
Baseload
The minimum amount of electric power delivered or required over a given period of time at a steady rate.
Baseload Capacity
Electric generating equipment normally operated to serve loads on an around-the-clock basis.
Basis
The differential that exists at any time between the cash, or spot, price of a given commodity and the price of the nearest futures contract for the same or a related commodity. Basis may reflect different time periods, product forms, qualities, or locations. Cash minus
futures equals basis.
Basis Risk
The uncertainty as to whether the cash-futures spread will widen or narrow between the time a hedge position is implemented and liquidated.
Bcf
Billion cubic feet.
B/D
Barrels per Day. Usually used to quantify a refiner's output capacity or an oilfield's rate of flow.
Bear
One who anticipates a decline in price or volatility. Opposite of a bull.
Bear Market
Market in which prices are in a declining trend.
Bear Spread
1) The simultaneous purchase and sale of two futures contracts in the same or related commodities with the intention of profiting from a decline in prices but, at the same time, limiting the potential loss if this expectation is wrong. This can
usually be accomplished by selling a nearby delivery and buying a deferred delivery. 2) A delta-negative options position comprised of long and short options of the same type, either calls or puts, designed to be profitable in a declining market. An option with a lower strike
price is sold and one with a higher strike price is bought.
Bid
A motion to buy a futures or options contract at a specified price. Opposite of offer.
Black-Scholes Model
An options pricing formula initially derived by Fisher Black and Myron Scholes for securities options and later refined by Mr. Black for options on futures.
Book Transfer
Transfer of title without actually delivering the product.
Box Spread
An options market arbitrage in which both a bull spread and a bear spread are established for a riskless profit. One spread includes put options and the other includes calls.
Break
A rapid and sharp price decline.
Breakeven Point
The underlying futures price at which a given options strategy is neither profitable nor unprofitable. For call options, it is the strike price plus the premium. For put options, it is the strike price minus the premium.
British Thermal Unit
The amount of heat required to increase the temperature of a pound of water 1o Fahrenheit. A Btu is used as a common measure of heating value for different fuels. Prices of different fuels and their units of measure (dollars per barrel of
crude, dollars per ton of coal, cents per gallon of gasoline, cents per thousand cubic feet of natural gas) can be easily compared when expressed as dollars and cents per million Btus.
Broker
1) An individual who is paid a fee or commission for acting as an agent in making contracts, sales, or purchases. 2) A floor broker is a person who actually executes trading orders on the floor of an exchange. 3) An account executive, registered commodity representative,
or customers' man who deals with customers and their orders in commission house offices. See also Futures Commission Merchant.
Btu
See British thermal unit.
Bulge
A rapid advance in futures prices.
Bull
One who anticipates an increase in price or volatility. Opposite of a bear.
Bull Market
Market in which prices are in an upward trend.
Bull Spread
1) 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. This can be
accomplished by buying the nearby delivery and selling the deferred. 2) A delta-positive options position composed of both long and short options of the same type, either calls or puts, designed to be profitable in a rising market. An option with a lower strike price is bought
and one with a higher strike price is sold.
Business Day
For electric utilities, as determined by the North American Electric Reliability Council (NERC), the business day typically begins at 6 A.M. (the hour ending 0700) for a 24-hour period. Holidays are also determined by NERC and are separate from
U.S.-designated holidays.
Buyer's Market
A condition of the market in which there is an abundance of goods available and hence buyers can afford to be selective and may be able to buy at less than the price that previously prevailed. See seller's market.
Buying Hedge
Also called a long hedge. Buying futures contracts to protect against possible increased costs of commodities that will be needed in the future.
Calendar Spread
An options position comprised of the purchase and sale of two options contracts of the same type that have the same strike prices but different expiration dates. Also known as a horizontal, or time spread.
Call Option
An option that gives the buyer (holder) the right, but not the obligation, to buy a futures contract (enter into a long futures position) for a specified price within a specified period of time in exchange for a one-time premium payment. It
obligates the seller (writer) of an option to sell the underlying futures contract (enter into a short futures position) at the designated price, should the option be exercised at that price.
Cap
A supply contract between a buyer and a seller, whereby the buyer is assured that he will not have to pay more than a given maximum price. This type of contract is analogous to a call option.
Capacity
In reference to electricity, the maximum load that a generating unit or generating station can carry under specified conditions for a given period of time without exceeding approval limits of temperature and stress.
Capacity (purchased)
The amount of electric energy and capacity available for purchase from outside a utility system.
Carrying Charge
The total cost of storing a physical commodity over a period of time. Includes storage charges, insurance, interest, and opportunity costs.
Cash Commodity
The actual physical commodity. Sometimes called a spot commodity or actuals.
Cash Market
The market for a cash commodity where the actual physical product is traded.
CF/D
Cubic feet per day. Usually used to quantify the rate of flow of a gas well or pipeline.
CFTC
See Commodity Futures Trading Commission.
Charting
The use of graphs and charts in the analysis of market behavior, so as to plot trends of price movements, average movements of price, volume, and open interest, in the hope that such graphs and charts will help one to anticipate and profit from
price trends. Contrasts with fundamental analysis.
CIF
Cost, Insurance, Freight. Term refers to a sale in which the buyer agrees to pay a unit price that includes the free on board (FOB) value at the port of origin plus all costs of insurance and transportation. This type of transaction differs from a "delivered"
agreement in that it is generally ex-duty, and the buyer accepts the quantity and quality at the loading port rather than paying for quality and quantity as determined at the unloading port. Risk and title are transferred from the seller to the buyer at the loading port, although
the seller is obliged to provide insurance in a transferable policy at the time of loading.
City Gate
Generally refers to the location at which gas changes ownership or transportation responsibility from a pipeline to a local distribution company or gas utility.
Class of Options
All call options, or all put options, exercisable for the same underlying futures contract and which expire on the same expiration date.
Clearing Member
Clearing members of the New York Mercantile Exchange accept responsibility for all trades cleared through them, and share secondary responsibility for the liquidity of the Exchange's clearing operation. They earn commissions for clearing their
customers' trades, and enjoy special margin privileges. Original margin requirements for clearing members are lower than for non-clearing members and customers, and clearing members may use letters of credit posted with the clearinghouse as original margin for customer accounts
as well as for their own trades. Clearing members must meet a minimum capital requirement.
Clearinghouse
An Exchange-associated body charged with the function of insuring the financial integrity of each trade. Orders are "cleared" by means of the clearinghouse acting as the buyer to all sellers and the seller to all buyers.
Closing Range
A range of prices at which transactions took place at the closing of the market; buying and selling orders during the closing period might have been filled at any point within such a range.
Collar
A supply contract between a buyer and seller of a commodity, whereby the buyer is assured that he will not have to pay more than some maximum price, and whereby the seller is assured of receiving some minimum price. This is analogous to an option fence, also known as a
range forward.
Commission
The fee charged by a futures broker for the execution of an order.
Commission House
An organization that trades commodities and/or futures and options contracts for customer accounts in return for a fee.
Commission Merchant
One who makes a trade, either for another member of an exchange or for a non-member client, but who makes the trade in his own name and becomes liable as principal to the other.
Commitment or Open Interest
The number of open or outstanding contracts for which an individual or entity is obligated to the Exchange because that individual or entity has not yet made an offsetting sale or purchase, an actual contract delivery, or, in the case of
options, exercised the option.
Commodity
As defined by the Commodity Futures Trading Commission, specifically enumerated agricultural commodities, all other goods and articles, except onions, and all services, rights, and interests in which contracts for future delivery are presently,
or in the future may be, dealt.
Commodity Futures Trading Commission
A federal regulatory agency authorized under the Commodity Futures Trading Commission Act of 1974 to regulate futures trading in all commodities. The commission is comprised of five commissioners, one of whom is designated as chairman, all
appointed by the President, subject to Senate confirmation. The CFTC is independent of the Cabinet departments.
Commodity Pool
A venture, usually a limited partnership, in which funds contributed by a number of investors are combined for the purpose of trading futures. Also called a commodity fund or a futures fund.
Commodity Pool Operator (CPO)
Acts as a general partner of commodity pools. CPOs hire independent Commodity Trading Advisors to handle daily trading decisions. Responsible for the pool's administration, structure, and selecting and monitoring the traders who conduct
transactions using the fund's money.
Commodity Trading Advisor (CTA)
Directs trading in the managed accounts of a commodity pool. Professional money managers who manage client assets on a discretionary basis, using global futures markets as an investment medium.
Contango Market
A market situation in which prices are higher in the succeeding delivery months than in the nearest delivery month. Opposite of backwardation.
Contingency Order
An order which becomes effective only upon the fulfillment of some condition in the marketplace.
Contract
1) A term of reference describing a unit of trading for a commodity future or option. 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.
Contract Grade
That grade of product established in the rules of a commodity futures exchange as being suitable for delivery against a futures contract.
Contract Months
See delivery month.
Contract Trading Volume
Daily trading volume.
Conversion
A delta-neutral arbitrage transaction involving a long futures contract, a long put option, and a short call option. The put and call options have the same strike price and same expiration date.
Cover
To offset a short futures or options position.
Covered Writing
The sale of an option against an existing position in the underlying futures contract. For example, short call and long futures.
Crack Spreads
The simultaneous purchase or sale of crude oil against the sale or purchase of refined petroleum products. These spread differentials which represent refining margins are normally quoted in dollars per barrel by converting the product prices
into dollars per barrel (divide the cents-per-gallon price by 42) and subtracting the crude oil price.
Cross Trade
Offsetting match by a broker of the buy order of one customer against the sell order of another, or a match of a trade made by a broker with his customer, a practice that is permissible only when executed in accordance with the Commodity
Exchange Act, Commodity Futures Trading Commission regulations, and rules of the contract market. Neither NYMEX Division nor COMEX Division members are permitted to take the opposite side of a customer's order, except, under certain circumstances, for trades involving long-dated
(nine months or more forward) COMEX Division copper futures.
Cubic Foot
The most common measure of gas volume, referring to the amount of gas needed to fill a volume of one cubic foot at 14.73 pounds per square inch absolute pressure and 60 degrees Fahrenheit. One cubic foot of natural gas contains, on average,
1,027 Btus.
Current Delivery Month
The futures contract which matures and becomes deliverable during the present month or the month closest to delivery. Also called the spot month.
Day Trade
The purchase and sale of a futures or an options contract on the same day. Dealer Tank Wagon Price (DTW) The price, usually of gasoline, offered by the majors which is branded and delivered to the service station on a cost, insurance, and
freight basis.
Degree Day
A measure of the coldness of the weather (heating degree day) or its heat (cooling degree day) based on the extent to which the daily mean temperature falls below or rises above 65 degrees Fahrenheit.
Dekatherm
Ten therms, 1 million British thermal units.
Delivered
Often regarded as synonymous with cost, insurance, and freight in the international cargo trade, its terms differ from the latter in a number of ways. Generally, the seller's risks are greater in a delivered transaction because the buyer pays
on the basis of landed quality/quantity. Risk and title are borne by the seller until such time as the commodity, such as oil, passes from shipboard into the connecting flange of the buyer's shore installation. The seller is responsible for clearance through customs and payment
of all duties. Any in-transit contamination or loss of cargo is the seller's liability. In delivered transactions, the buyer pays only for the quantity of oil actually received in storage.
Delivery
The term has distinct meaning when used in connection with futures contracts. Delivery generally refers to the changing of ownership or control of a commodity under specific terms and procedures established by the exchange upon which the
contract is traded. Typically, except for energy, the commodity must be placed in an approved warehouse, precious metals depository, or other storage facility, and be inspected by approved personnel, after which the facility issues a warehouse receipt, shipping certificate,
demand certificate, or due bill, which becomes a transferable delivery instrument. Delivery of the instrument usually is preceded by a notice of intention to deliver. After receipt of the delivery instrument, the new owner typically can take possession of the physical commodity,
can deliver the delivery instrument into the futures market in satisfaction of a short position, or can sell the delivery instrument to another market participant who can use it for delivery into the futures market in satisfaction of his short position or for cash, or can take
delivery of the physical himself. The procedure differs for energy contracts. Bona fide buyers or sellers of the underlying energy commodity can stand for delivery. If a buyer or seller stands for delivery, the contract is held through the termination of trading. The buyer and
seller each file a notice of intent to make or take delivery with their respective clearing members who file them with the Exchange. Buyers and sellers are randomly matched by the Exchange. The delivery payment is based on the contract's final settlement price.
Delivery Month
The month specified in a given futures contract for delivery of the actual physical spot or cash commodity.
Delivery Notice
A notice presented through an exchange's clearinghouse by a clearing member announcing the intention to deliver the actual commodity in satisfaction of a contract obligation.
Delivery Point(s)
Location(s) designated by an exchange at which delivery may be made in fulfillment of contract terms.
Delta
The sensitivity of an option's value to a change in the price of the underlying futures contract, also referred to as an option's futures-equivalent position. Deltas are positive for calls, and negative for puts. Deltas of deep in-the-money options are approximately equal
to one; deltas of at-the-money options are 0.5; and deltas of deep out-of-the-money options approach zero.
Delta Neutral Spread
A spread where the total delta position on the long side and the total delta on the short side add up to approximately zero.
Depository or Warehouse Receipt
A document issued by a bank or warehouse indicating ownership of a commodity stored in a bank depository or warehouse. In the case of many commodities deliverable against futures contracts, transfer of ownership of an appropriate depository
receipt may effect contract delivery.
Derivative
Financial instrument derived from a cash market commodity, futures contract, or other financial instrument. Derivatives can be traded on regulated exchange markets or over-the-counter. For example, futures contracts are derivatives of physical
commodities, options on futures are derivatives of futures contracts.
Differentials
Price differences between classes, grades, and locations of different stocks of the same commodity.
Discount
1) A downward adjustment in price allowed for delivery of stocks of a commodity of lesser than contract grade against a futures contract. 2) Sometimes used to refer to the price differences between futures of different delivery months.
Discretionary Account
An arrangement by which the holder of an account gives written power of attorney to someone else, often a broker, to buy and sell without prior approval of the account holder. Often referred to as a "managed account."
Double Bottoms
A chart pattern of the price movement of a commodity that shows resistance to a falling market; the inverse of double tops. The price patterns are used by technical analysts to recognize a reversal of a price trend.
Double Tops
A chart pattern of commodity price movements that depict a rising market which hits resistance at a certain level, retreats, rises again, but still cannot breach the previous resistance point, and falls back again. The price patterns are used
by technical analysts to recognize a reversal of a price trend.
EFP
See Exchange of Futures for Physicals.
Electronic Trader
A person who is authorized to enter orders for his own account and/or for customers' accounts on the NYMEX ACCESS® electronic trading system.
European Option
An option that may be exercised only on its expiration date.
Exchange of Futures for Cash
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.
Exchange of Futures for Physicals
A futures contract provision involving an agreement for delivery of physical product that does not necessarily conform to contract specifications in all terms from one market participant to another and a concomitant assumption of equal and
opposite futures positions by the same participants at the time of the agreement.
Exercise
The process of converting an options contract into a futures position.
Exercise Price
The price at which the underlying futures contract will be bought or sold in the event an option is exercised. Also called the strike price.
Expiration Date
The date and time after which trading in an options contracts terminates, and after which all contract rights or obligations become null and void.
Extrinsic Value
The amount by which the premium exceeds its intrinsic value. Also known as time value.
Fair Value
Theoretical value.
Fast Market
Transactions in the ring that take place in such volume and with such rapidity that price reporters are behind with price quotations, so they insert "Fast" and show a range of prices.
Fence
A long (short) underlying position together with a long (short) out-of-the-money put and a short (long) out-of-the-money call. All options must expire at the same time.
FIA
Futures Industry Association. A national not-for-profit futures industry trade association that represents the brokerage community on industry, regulatory, political, and educational issues.
Fill
The price at which an order is executed.
Fill or Kill
An order which must be filled immediately, and in its entirety. Failing this, the order will be canceled.
Firm Energy
The highest quality sales of electric transmission service offered to customers under a filed rate schedule that anticipates no planned interruption.
First Notice Day
The first day on which the clearinghouse notifies clearing members of delivery allocations. Energy contracts have only one notice day. Metals contracts have notice days just prior to the beginning and end of the delivery period.
Floor
1) The main trading area of an exchange. 2) A supply contract between a buyer and seller of a commodity, whereby the seller is assured that he will receive at least some minimum price. This type of contract is analogous to a put option.
Floor Broker
An exchange member who executes orders to buy or sell futures and options in the trading ring on the floor of a commodities exchange.
Floor Trader or Local
An exchange member who buys or sells futures and/or options for his own account.
Force Majeure
A standard clause which indemnifies either or both parties to a transaction whenever events which the Exchange declares to be reasonably beyond the contract.
Forward Contract
A supply contract between a buyer and seller, whereby the buyer is obligated to take delivery and the seller is obligated to provide delivery of a fixed amount of a commodity at a predetermined price on a specified future date. Payment in full
is due at the time of, or following, delivery. This differs from a futures contract where settlement is made daily, resulting in partial payment over the life of the contract.
Free on Board (FOB)
A transaction in which the seller provides a commodity at an agreed unit price, at a specified loading point within a specified period; it is the responsibility of the buyer to arrange for transportation and insurance.
Fundamental Analysis
The study of pertinent supply and demand factors which influence the specific price behavior of commodities. See also Technical Analysis.
Fungible
Interchangeable. Products which can be substituted for purposes of shipment or storage.
Futures Contract
A supply contract between a buyer and seller, whereby the buyer is obligated to take delivery and the seller is obligated to provide delivery of a fixed amount of a commodity at a predetermined price at a specified location. Futures contracts
are traded exclusively on regulated exchanges and are settled daily based on their current value in the marketplace.
Futures Commission Merchant
An FCM is the only industry participant who receives, handles, and manages customer funds, margin payments, and commission charges. He is also responsible for confirmation of trade slips, customer statements, and guarantees.
Futures-Equivalent
A term frequently used with reference to speculative position limits for options on futures contracts. The futures-equivalent of an options position is the number of options multiplied by the previous day's risk factor or delta for the options
series. For example, 10 deep out-of-the money options with a risk factor of 0.20 would be considered two futures-equivalent contracts. The delta or risk factors used for this purpose is the same as that used in delta-based margining and risk analysis systems.
Gamma
The sensitivity of an option's delta to changes in the price of the underlying futures contract.
Gigajoule (GJ)
One billion joules, approximately equal to 948,211 British thermal units. One million Btus equals 1.0546175 GJ.
Gigawatt (GW)
One billion watts. Gold/Silver Ratio The number of ounces of silver required to buy one ounce of gold at current spot prices.
Good till Canceled
An order to be held by a broker until it can be filled or until canceled.
Heating Oil
No. 2 fuel oil, a distillate fuel oil used either for domestic heating or in moderate capacity commercial-industrial burners.
Heavy Crude
Crude oil with a high specific gravity and a low API gravity due to the presence of a high proportion of heavy hydrocarbon fractions.
Hedge
The initiation of a position in a futures or options market that is intended as a temporary substitute for the sale or purchase of the actual commodity. The sale of futures contracts in anticipation of future sales of cash commodities as a protection against possible price
declines, or the purchase of futures contracts in anticipation of future purchases of cash commodities as a protection against the possibility of increasing costs.
Hedger
A trader who enters the market with the specific intent of protecting an existing or anticipated physical market exposure from unexpected or adverse price fluctuations.
Hedge Ratio
1) 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. 2) The ratio, determined by an option's delta, of futures to options required to
establish a riskless position. For example, if a $1/barrel change in the underlying futures price leads to a $0.25/barrel change in the options premium, the hedge ratio is four (four options for each futures contract).
Historical Volatility
The annualized standard deviation of percent changes in futures prices over a specific period. It is an indication of past volatility in the marketplace.
Horizontal Spread
Calendar or time spread.
Imbalance Energy
Discrepancy between the amount that a seller contracted to deliver and the actual volume of power delivered. Imbalances are resolved through monetary payment.
Immediate or Cancel
An order which must be filled immediately or be canceled. IOC orders need not be filled in their entirety.
Implied Volatility
A measurement of the market's expected price range of the underlying commodity futures based on market-traded options premiums.
In-the-Money
An option that can be exercised and immediately closed out against the underlying market for a cash credit. The option is in-the-money if the underlying futures price is above a call option's strike price, or below a put option's strike price.
Intrinsic Value
The amount by which an option is in-the-money. An option which is not in-the-money has no intrinsic value. For calls, intrinsic value equals the difference between the underlying futures price and the option's strike price. For puts, intrinsic
value equals the option's strike price minus the underlying futures price. Intrinsic value is never less than zero.
Introducing Broker
A firm engaged in soliciting or in accepting orders for the purchase or sale of any commodity for future delivery.
Inverted Market
A futures market is said to be inverted when distant contract months are selling at a discount to nearby contract months; also known as backwardation.
Joule
A metric unit of energy.
Kilowatt (KW)
One thousand watts.
Kilowatt Hour (Kwh)
Amount of electricity needed to light ten 100-watt light bulbs for a one-hour period. One thousand watts used for one hour.
Last Notice Day
The final day on which notices of intent to deliver on futures contracts may be issued.
Last Trading Day
The final trading day for a particular delivery month futures contract or options contract. Any futures contracts left open following this session must be settled by delivery.
Limit
The maximum daily allowable amount a futures price may advance or decline in any one day's trading session. Limits are also placed on the number of positions a participant may hold in the market.
Limit Order
A contingent order for an options or futures trade specifying a certain maximum (or minimum) price, beyond which the order (buy or sell) is not to be executed.
Liquidation
The closing out of futures and options positions.
Liquidity
A market is said to be "liquid" when it has a high level of trading activity and open interest.
Liquid Market
A market characterized by the ability to buy and sell with relative ease.
Local
An exchange member who buys or sells futures and/or options for his own account.
Local Distribution Company (LDC)
Company that distributes natural gas primarily to end-users. A gas utility.
Locked Market
A market where prices have reached their daily trading limit and trading can only be conducted at that price or prices which are closer to the previous settlement price.
Long
1) The market position of a futures contract buyer whose purchase obligates him to accept delivery unless he liquidates his contract with an offsetting sale. 2) One who has bought a futures contract to establish a market position. 3) In the options market, position of the
buyer of a call or put options contract. Opposite of short.
Long Hedge
Purchase of futures against the future market price purchase or fixed price forward sale of a cash commodity to protect against price increases.
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.
Lot
Any definite quantity of a futures commodity of uniform grade; the standard unit of trading.
Margin
The amount of money or collateral deposited by a customer with his broker, or deposited 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 adverse price movement on open
futures contracts. The margin is not partial payment on a purchase. 1) Initial margin is the minimum deposit 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
customers' account drops to, or under, that level because of an adverse price movement, the broker must issue a margin call to restore the customers' equity. Margins are set by the Exchange based on its analysis of price risk volatility in the market at that time. See variation
margin.
Margin Call
A demand for additional margin funds when futures prices move adverse to a trader's position, or if margin requirements are increased. Buyers of options are not subject to margin calls.
Marked-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 options contract position by calculating the gain or loss in each contract position resulting from changes in the price of
the futures or options contracts at the end of each trading day.
Market Correction
In technical analysis, a small reversal in prices following a significant trending period.
Market-if-Touched 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.
Market Maker
An independent trader or trading firm which is prepared to buy and sell futures or options contracts in a designated market. Market makers provide a two-sided (bid and ask) market and greater liquidity.
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.
Market Order
An order to be filled immediately at the current market price.
Maximum Price Fluctuation
A commodity exchange's established maximum limits for fluctuations in futures prices during any one trading session.
Mcf
Thousand cubic feet.
Megawatt (MW)
One million watts.
Megawatt Hour (Mwh)
Amount of electricity needed to light ten thousand 100-watt light bulbs for a one-hour period. One million watts used for one hour.
Minimum Price Fluctuation
Minimum unit by which a futures price or an options premium can fluctuate per trade, also known as tick size.
MMBtu
One million British thermal units, one dekatherm. Approximately equal to a thousand cubic feet (Mcf) of natural gas.
Naked
A long or short market position taken without having an offsetting short or long position. A trader who executes one side of a spread is said to be naked until he executes the other side.
National Futures Association
Futures industry trade association which promulgates rules of conduct and mediates disputes between customers and brokers.
Natural Gas
A naturally occurring mixture of hydrocarbon and non-hydrocarbon gases found in porous rock formations. Its principal component is methane.
Natural Gas Liquids (NGL)
A general term for all liquid products separated from natural gas in a gas processing plant. NGLs include propane, butane, ethane, and natural gasoline.
Netback
Industry term referring to the net free on board cost of product offered on a delivered or cost, insurance, and freight basis. It is derived by subtracting all costs of shipment from the landed price.
Net Position
The difference between an individual or firm's open long contracts and open short contracts in any one commodity.
Neutral Spread
Another name for a delta neutral spread. Spreads may also be lot neutral, where the total number of long contracts and the total number of short contracts of the same type are approximately equal.
Nominal Price
The declared price for a futures month sometimes used in place of a closing price when no recent trading has taken place in that particular delivery month; usually an average of the bid and asked prices.
Non-Firm Energy
The quality sale of transmission service offered to customers that anticipates possible interruption of deliveries.
North America Electric Reliability Council (NERC)
A group formed in 1968 by the electric utility industry to promote the reliability and adequacy of bulk power supply in the electric utility systems of North America. NERC consists of 10 regional reliability councils and encompasses essentially
all the power regions of the contiguous United States, Canada, and Mexico. The NERC regions are: Alaskan System Coordination Council, ASCC; East Central Reliability Coordination Agreement, ECAR; Electric Reliability Council of Texas, ERCO; Mid-America Interpool Network, MAIN;
Mid-Atlantic Area Council, MAAC; Mid-Continent Area Power Pool, MAPP; Northeast Power Coordinating Council, NPCC; Southeastern Electric Reliability Council, SERC; Southwest Power Pool, SPP; Western System Coordinating Council, WSCC.
Notional Settlement
A reference price based on trading activity during a certain range close to the end of the day that is used to calculate the maximum daily price fluctuation for trading on the NYMEX ACCESS® after-hours electronic trading system when the
regular settlement price has not been established in time for the start of the NYMEX ACCESS® session. The system is then updated with final settlement prices later in the session.
NYMEX ACCESS®
NYMEX ACCESS® is an international after-hours trading system offered by the New York Mercantile Exchange. The Exchange provides the user with the equipment, software, and services. ACCESS stands for American Computerized Commodity Exchange
System and Services.
Offer
A motion to sell a futures or options contract at a specified price. Opposite of bid.
Off-Peak
The load for the remaining hours that are not on-peak (See on-peak).
Offset
A transaction which liquidates or closes out an open contract position. In spread positions, one side offsets the other without liquidating the entire position. Risk is reduced when one side offsets the other.
Omnibus Account
An account carried by one futures commission merchant with another in which the transactions of two or more persons are combined rather than designated separately and the identity of the individual accounts is not disclosed.
On-Peak
Refers to hours of the business day when demand is at its peak. For example, the NYMEX Division California-Oregon border and Palo Verde electricity futures contracts define the on-peak period from the hour ending 0700 to the hour ending 2200 (6 A.M. to 10 P.M.), prevailing
time. In the physical market, on-peak definitions vary by North America Electric Reliability Council region.
One Cancels the Other
Two orders submitted simultaneously, either of which may be filled. If one order is filled, the other is considered to be canceled.
Open Interest or Commitment
The number of open or outstanding contracts for which an individual or entity is obligated to the Exchange because that individual or entity has not yet made an offsetting sale or purchase, an actual contract delivery, or, in the case of
options, exercised the option.
Open Order
A resting order that is good until canceled.
Open Outcry
A method of public auction for making verbal bids and offers for contracts in the trading pits or rings of commodity exchanges.
Opening Price
The price for a given futures commodity that is generated by trading through open outcry during the opening range of trading on a commodity exchange.
Option
A contract which gives the holder the right, but not the obligation, to purchase or to sell the underlying futures contract at a specified price within a specified period of time in exchange for a one-time premium payment. The contract also obligates the writer, who
receives the premium, to meet these obligations.
Original Margin
The initial deposit of funds, as good faith monies, when a position is initiated in order to guarantee fulfillment of its obligations. Also known as initial margin.
Out-of-the-Money
An option which has no intrinsic value. For calls, an option whose exercise price is above the market price of the underlying future. For puts, an option whose exercise price is below the futures price.
Overbought
A technical opinion that the market price has risen too steeply and too fast in relation to underlying fundamental factors.
Oversold
A technical opinion that the market price has declined too steeply and too fast in relation to underlying fundamental factors.
Overwrite
The writing of more options than one expects to have exercised. Call options are overwritten because the writer considers the underlying overvalued. Put options are overwritten because the underlying is considered undervalued.
PAD (or PADD)
Petroleum Administration for Defense District. The United States is divided into five distinct marketing regions in which prices might differ due to variations in the supply or demand.
Paper Barrels
A term used to denote trade in non-physical oil (futures, forwards, swaps, etc.) markets which give a buyer or seller the right to a certain quantity and quality of crude oil or refined products at a future date, but not to any specific
physical lot.
Par or Basis Grade
The grade or grades specified in a given futures contract for delivery. A contract may permit substitutions for and deviations from the par grade subject to specified premiums or discounts.
Petroleum
A generic name for hydrocarbons, including crude oil, natural gas liquids, refined, and product derivatives.
Pin Risk
The risk to a trader who has sold an option that, at expiration, has a strike price identical to, or pinned to, the underlying futures price. In this case, the trader will not know whether he will be required to assume his options obligations.
Pit or Ring
The place on the floor of an exchange where a commodity futures or options contract is traded by open outcry. Natural Gas, Electricity, Oil, Platinum Group Metals (PGM) Platinum and related metals, including palladium, rhodium, ruthenium, and
iridium.
Point or Tick
The smallest monetary unit of change in a futures price or an options premium.
Position
The net total of a trader's open contracts, either long or short, in a particular underlying commodity.
Position Limit
For a single trader or firm, the maximum number of allowable open contracts in the same underlying commodity.
Posted Price
The price some refiners will pay for crude of a certain API gravity from a particular field or area.
Premium
1) The price or cost of an option determined competitively by buyers and sellers in open outcry trading on the exchange trading floor. 2) An upward adjustment in price allowed for delivery of a commodity of higher grade against a futures contract.
Price Discovery
The manner of making prices visible and readily available to the public.
Price Gaps
A chart pattern of the price movement of a commodity when the low price of one bar on a chart is higher than the high of the preceding bar (or inversely, the high is lower than the low of the preceding bar); depicting a price or price range
where no trades take place. The price patterns are used by technical analysts to try to recognize changes in a price trend.
Propane
A natural hydrocarbon occurring in a gaseous state under normal atmospheric pressure and temperature, however, propane is usually liquefied through pressurization for transportation and storage. Propane is primarily used for rural heating and cooking and as a fuel gas in
areas not serviced by natural gas mains and as a petrochemical feed stock.
Put Option
An option which gives the buyer, or holder, the right, but not the obligation, to sell a futures contract at a specific price within a specific period of time in exchange for a one-time premium payment. It obligates the seller, or writer, of
the option to buy the underlying futures contract at the designated price, should an option be exercised at that price. See call option.
Rack Price
Price charged by a supplier to a customer that buys transport truck lots at a terminal, on a free on board basis.
Rally
An advancing price movement following a decline in a market.
Range
The difference between the highest and lowest prices recorded during a given trading period.
Ratio Spread
Any spread where the number of long market contracts and the number of short market contracts are unequal.
Reportable Position
The number of futures contracts, as determined by the Exchange or the Commodity Futures Trading Commission, above which a customer must be identified daily to the Exchange and to the Commission with regard to the size of his position by
commodity, by delivery month, and by purpose of the trading.
Residual Fuel Oil
Heavy fuel oil produced from the residue in the fractional distillation process rather than from the distilled fractions.
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