Glossary

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A B C E F H I L M O P S T U W

at-the-money option
An option whose strike price is equal-or approximately equal-to the current market price of the underlying futures contract.

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basis
The difference between the local cash price of a commodity and the price of a related futures contract, i.e., cash price - futures price = basis.

bearish
A market view that anticipates lower prices.

break-even point The futures price at which a given option 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.

bullish
A market view that anticipates higher prices.

buyer The purchaser of either a call option or a put option. The buyer also may be referred to as the option holder. Option buyers receive the right, but not the obligation, to enter a futures market position.

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call option An option that gives the option buyer the right to purchase (go "long") the underlying futures contract at the strike price on or before the expiration date.

CME Group
The CME Group was formed in the merger of the Chicago Board of Trade and the Chicago Mercantile Exchange.

CFTC Commodity Futures Trading Commission

closing transaction See liquidation.

commission Fees paid to the broker for execution of an order.

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exercise The action taken by the holder of a call if he wishes to purchase the underlying futures contract or by the holder of a put if he wishes to sell the underlying futures contract.

exercise price Same as the strike price.

expiration date The last date on which the option may be exercised. Although options expire on a specified date during the month prior to the named month, an option on a November futures contract is referred to as a November option, since its exercise would lead to the creation of a November futures position.

expire
To hold onto an option position until the option's expiration date.

extrinsic value
Same as time value.

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futures contract A contract traded on a futures exchange for the delivery of a specified commodity at a future time. The contract specifies the item to be delivered and the terms and conditions of delivery.

futures price The price of a particular futures contract determined by open competition between buyers and sellers on the trading floor of a commodity exchange or through the exchange's electronic order-entry system.

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hedge
The buying or selling of futures contracts and/or options contracts for protection against the possibility of a price change in the physical commodity.

holder
See buyer.

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in-the-money option
A call is in-the-money if its strike price is below the current price of the underlying futures contract (i.e., if the option has intrinsic value). A put is in-the-money if its strike price is above the current price of the underlying futures contract (i.e., if the option has intrinsic value).

intrinsic value The dollar amount that would be realized if the option were to be exercised immediately. See in-the-money option.

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liquidation A purchase or sale that offsets an existing position. This may be done by selling an option that was previously purchased or by buying back an option that was previously sold.

long A position established by purchasing a futures contract or an options contract (either a call or a put).

long hedge Buying a futures contract(s) and/or using an option contract(s) to protect the purchase price of a commodity one is planning to buy.

margin	In commodities, an amount of money deposited to ensure fulfillment of a futures contract at a future date. Option buyers do not post margin, since their risk is limited to the option premium, which is paid in cash when the option is purchased. Option sellers are required to post margin.
margin call	A call made by a brokerage firm to a market participant to deposit additional funds into one's margin account to bring it up to the required level. The reason for additional funds can be the result of a losing market position or an increase in the required margin.
MidAm	MidAmerica Commodity Exchange

offset	Taking a second option position equal and opposite to the initial or opening position, "close out."
opening transaction	A purchase or sale that establishes a new position.
open interest	Total number of futures or options (puts and calls) contracts outstanding on a given commodity.
out-of-the-money option	A put or call option that currently has no intrinsic value. That is, a call whose strike price is above the current futures price or a put whose strike price is below the current futures price.

premium	The price of a particular option contract determined by trading between buyers and sellers. Premium does not include related brokerage commission fees. The premium is the maximum amount of potential loss to which the option buyer may be subject.
put option	An option that gives the option buyer the right to sell (go "short") the underlying futures contract at the strike price on or before the expiration date.

seller	Also known as the option writer or grantor. An option seller is subject to a potential obligation if the buyer chooses to exercise the option.
serial option	Short-term option contracts that trade for approximately 30 days and expire during those months in which there is not a standard option contract expiring. These options are listed for trading only on the nearby futures contract, unlike standard options, which can be listed for nearby and deferred contract months.
short	The position created by the sale of a futures contract or option (either a call or a put).
short hedge	Selling a futures contract(s) and/or using an options contract(s) to protect the sale price of a commodity one is planning to sell.
speculator	A market participant who buys and sells futures and/or options in hopes of making a profit - adding liquidity to the market.
standard option	Traditional option contracts trading in those months which are the same as the underlying futures contract. Standard option contracts can be listed for nearby and deferred contract months.
strike price	The price at which the holder of a call (put) may choose to exercise his right to purchase (sell) the underlying futures contract.

time value	The amount by which an option's premium exceeds the option's intrinsic value. If an option has no intrinsic value, its premium is entirely time value.
transaction cost	Fees charged by brokers including exchange fees to buy and sell futures and/or options contracts.

uncovered option	Writing a call or a put on a futures contract in which the seller has no opposite cash, futures, or other option position.
underlying futures contract	The specific futures contract that may be bought or sold by the exercise of an option.

writer

See seller.

There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products.
Past performance is not indicative of future results.

Page Contents © 2000-2011 Advanced Commodity Strategies
Site Design and Graphics © 2000-2011 Ric Johnson Productions
Last Revised 5/4/11

basis	The difference between the local cash price of a commodity and the price of a related futures contract, i.e., cash price - futures price = basis.
bearish	A market view that anticipates lower prices.
break-even point	The futures price at which a given option 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.
bullish	A market view that anticipates higher prices.
buyer	The purchaser of either a call option or a put option. The buyer also may be referred to as the option holder. Option buyers receive the right, but not the obligation, to enter a futures market position.

call option	An option that gives the option buyer the right to purchase (go "long") the underlying futures contract at the strike price on or before the expiration date.
CME Group	The CME Group was formed in the merger of the Chicago Board of Trade and the Chicago Mercantile Exchange.
CFTC	Commodity Futures Trading Commission
closing transaction	See liquidation.
commission	Fees paid to the broker for execution of an order.

exercise	The action taken by the holder of a call if he wishes to purchase the underlying futures contract or by the holder of a put if he wishes to sell the underlying futures contract.
exercise price	Same as the strike price.
expiration date	The last date on which the option may be exercised. Although options expire on a specified date during the month prior to the named month, an option on a November futures contract is referred to as a November option, since its exercise would lead to the creation of a November futures position.
expire	To hold onto an option position until the option's expiration date.
extrinsic value	Same as time value.

futures contract	A contract traded on a futures exchange for the delivery of a specified commodity at a future time. The contract specifies the item to be delivered and the terms and conditions of delivery.
futures price	The price of a particular futures contract determined by open competition between buyers and sellers on the trading floor of a commodity exchange or through the exchange's electronic order-entry system.

hedge	The buying or selling of futures contracts and/or options contracts for protection against the possibility of a price change in the physical commodity.
holder	See buyer.

in-the-money option	A call is in-the-money if its strike price is below the current price of the underlying futures contract (i.e., if the option has intrinsic value). A put is in-the-money if its strike price is above the current price of the underlying futures contract (i.e., if the option has intrinsic value).
intrinsic value	The dollar amount that would be realized if the option were to be exercised immediately. See in-the-money option.

liquidation	A purchase or sale that offsets an existing position. This may be done by selling an option that was previously purchased or by buying back an option that was previously sold.
long	A position established by purchasing a futures contract or an options contract (either a call or a put).
long hedge	Buying a futures contract(s) and/or using an option contract(s) to protect the purchase price of a commodity one is planning to buy.