Calendar spread
The sale of an option with a nearby expiration against the purchase of an option with the same strike price, but a more distant expiration. The loss is limited to the net premium paid, while the maximum profit possible depends on the time value of the distant option when the nearby expires. The strategy takes advantage of time value differentials during periods of relatively flat prices.
Call
The period at market opening or closing during which futures contract prices are established by auction.
Call option
A contract giving the buyer the right to purchase something within a certain period of time at a specified price. The seller receives money (the premium) for the sale of this right. The contract also obligates the seller to deliver, if the buyer exercises his right to purchase.
Carrying charges
The cost of storing a physical commodity, consisting of interest on the invested funds, insurance, storage fees, and other incidental costs. Carrying costs are usually reflected in the difference between futures prices for different delivery months. When futures prices for deferred contract maturities are higher than for nearby maturities, it is a carrying charge market. A full carrying charge market reimburses the owner of the physical commodity for its storage until the delivery date.
Carryover
The portion of existing supplies remaining from a prior production period.
Cash commodity/cash market
The actual or physical commodity. The market in which the physical commodity is traded, as opposed to the futures market, where contracts for future delivery of the physical commodity are traded. See also Actuals.
Cash flow
The cash receipts and payments of a business. This differs from net income after taxes in that non-cash expenses are not included in a cash flow statement. If more cash comes in than goes out, there is a positive cash flow, while more outgoing cash causes a negative cash flow.
Cash forward contract
See Forward contract.
Cash market
A market in which goods are purchased either immediately for cash, as in a cash and carry contract, or where they are contracted for presently, with delivery occurring at the time of payment. All terms of the contract are negotiated between the buyer and seller.
Cash price
The cost of a good or service when purchased for cash. In commodity trading, the cash price is the cost of buying the physical commodity on the current day in the spot market, rather than buying contracts in the futures market.
Cash settlement
Instead of having the actuals delivered, cash is transferred upon settlement.
Certificate of Deposit (CD)
A large time deposit with a bank, having a specific maturity date and yield stated on the certificate. CDs usually are issued with $100,000 to $1,000,000 face values.
Certificated stock
Stocks of a physical commodity that have been inspected by the exchange and found to be acceptable for delivery on a futures contract. They are stored at designated delivery points.
Charting
When technicians analyze the futures markets, they employ graphs and charts to plot the price movements, volume, open interest, or other statistical indicators of price movement. See also Technical analysis and Bar chart.
Clearinghouse
An agency associated with an exchange which guarantees all trades, thus assuring contract delivery and/or financial settlement. The clearinghouse becomes the buyer for every seller, and the seller for every buyer.
Churning
When a broker engages in excessive trading to derive a profit from commissions while ignoring his client’s best interests.
Clearing margin
Funds deposited by a futures commission merchant with its clearing member.
Clearing member
A clearinghouse member responsible for executing client trades. Clearing members also monitor the financial capability of their clients by requiring sufficient margins and position reports.
Close or closing range
The range of prices found during the last two minutes of trading. The average price during the “close” is used as the settlement price from which the allowable trading range is set for the following day.
Commercials
Firms that are actively hedging their cash grain positions in the futures markets; e.g., millers, exporters, and elevators.
Commission
The fee which clearing-houses charge their clients to buy and sell futures and futures options contracts. The fee that brokers charge their clients is also called a commission.
Commission house
Another term used to describe brokerage firms because they earn their living by charging commissions. See also Futures Commission Merchant.
Commodity
A good or item of trade or commerce. Goods tradable on an exchange, such as corn, gold, or hogs, as distinguished from instruments or other intangibles like T-Bills or stock indexes.
Commodity Credit Corporation (CCC)
A government-owned corporation established in 1933 to support prices through purchases of excess crops, to control supply through acreage reduction programs, and to devise export programs.
Commodity Futures Trading Commission (CFTC)
A federal regulatory agency established in 1974 to administer the Commodity Exchange Act. This agency monitors the futures and futures options markets through the exchanges, futures commission merchants and their agents, floor brokers, and customers who use the markets for either commercial or investment purposes.
Commodity pool
A venture where several persons contribute funds to trade futures or futures options. A commodity pool is not to be confused with a joint account.
Commodity Pool Operator (CPO)
An individual or firm who accepts funds, securities, or property for trading commodity futures contracts, and combines customer funds into pools. The larger the account, or pool, the more staying power the CPO and his clients have. They may be able to last through a dip in prices until the position becomes profitable. CPOs must register with the CFTC and NFA, and are closely regulated.
Commodity-product spread
The simultaneous purchase (or sale) of a commodity and the sale (or purchase) of the products derived from that commodity; for example, buying soybeans and selling soybean oil and meal. This is known as a crush spread. Another example is the crack spread, where the crude oil is purchased and gasoline and heating oil are sold.
Commodity Trading Advisor (CTA)
An individual or firm who directly or indirectly advises others about buying or selling futures or futures options. Analyses, reports, or newsletters concerning futures may be issued by a CTA; he may also engage in placing trades for other people’s accounts. CTAs are required to be registered with the CFTC and to belong to the NFA.
Confirmation statement
After a futures or options position has been initiated, a statement must be issued to the customer by the commission house. The statement contains the number of contracts bought or sold, and the prices at which the transactions occurred, and is sometimes combined with a purchase and sale statement.
Congestion
A charting term used to describe an area of sideways price movement. Such a range is thought to provide support or resistance to price action.
Contract
A legally enforceable agreement between two or more parties for performing, or refraining from performing, some specified act; e.g., delivering 5,000 bushels of corn at a specified grade, time, place, and price.
Contract market
Designated by the CFTC, a contract market is a board of trade set up to trade futures or option contracts, and generally means any exchange on which futures are traded. See Board of trade and Exchange.
Contract month
The month in which a contract comes due for delivery according to the futures contract terms.
Controlled account
See Discretionary accounts.
Contrarian theory
A theory suggesting that the general consensus about trends is wrong. The contrarian takes the opposite position from the majority opinion to capitalize on overbought or oversold situations.
Convergence
The coming together of futures prices and cash market prices on the last trading day of a futures contract.
Conversion
The sale of a cash position and investment of part of the proceeds in the margin for a long futures position. The remaining money is placed in an interest-bearing instrument. This practice allows the investor/dealer to receive high rates of interest, and take delivery of the commodity if needed.
Conversion factor
A figure published by the CBOT used to adjust a T-Bond hedge for the difference in maturity between the T-Bond contract specifications and the T-Bonds being hedged.
Cover
Used to indicate the repurchase of previously sold contracts as, he covered his short position. Short covering is synonymous with liquidating a short position or evening up a short position.
Covered position
A transaction which has been offset with an opposite and equal transaction; for example, if a gold futures contract had been purchased, and later a call option for the same commodity amount and delivery date was sold, the trader’s option position is “covered.” He holds the futures contract deliverable on the option if it is exercised. Also used to indicate the repurchase of previously sold contracts as, he covered his short position.
Crack spread
A type of commodity-product spread involving the purchase of crude oil futures and the sale of gasoline and heating oil futures.
Cross-hedge
A hedger’s cash commodity and the commodities traded on an exchange are not always of the same type, quality, or grade. Therefore, a hedger may have to select a similar commodity (one with similar price movement) for his hedge. This is known as a “cross-hedge.”
Crush spread
A type of commodity-product spread which involves the purchase of soybean futures and the sale of soybean oil and soybean meal futures.
