Last trading day
The last day on which a futures contract is traded.
Law of Demand
Demand exhibits a direct relationship to price. If all other factors remain constant, an increase in demand leads to an increased price, while a decrease in demand leads to a decreased price.
Law of Supply
Supply exhibits an inverse relationship to price. If all other factors hold constant, an increase in supply causes a decreased price, while a decrease in supply causes an increased price.
Letter of acknowledgment
A form received with a Disclosure Document intended for the customer’s signature upon reading and understanding the Disclosure Document. The FCM is required to maintain all letters of acknowledgment on file. It may also be known as a Third Party Account Controllers form.
Leverage
The control of a larger sum of money with a smaller amount. By accepting the liability to purchase or deliver the total value of a futures contract, a smaller sum (margin) may be used as earnest money to guarantee performance. If prices move favorably, a large return on the margin can be earned from the leverage. Conversely, a loss can also be large, relative to the margin, due to the leverage.
Liability
1) In the broad legal sense, responsibility or obligation. For example, a person is liable to pay his debts, under the law; 2) In accounting, any debt owed by an individual or organization. Current, or short-term, liabilities are those to be paid in less than one year (wages, taxes, accounts payable, etc.). Long-term, or fixed, liabilities are those that run for one year or more (mortgages, bonds, etc.); 3) In futures, traders deposit margin as earnest money, but they are liable for the entire value of the contract; 4) In futures options, purchasers of options have their liability limited to the premium they pay; option writers are subject to the liability associated with the underlying deliverable futures contract.
Limit
See Price limit, Position limit, and Variable limit.
Limit move
The increase or decrease of a price by the maximum amount allowed for any one trading session. Price limits are established by the exchanges, and approved by the CFTC. They vary from contract to contract.
Limit orders
A customer sets a limit on price or time of execution of a trade, or both; for example, a “buy limit” order is placed below the market price. A “sell limit” order is placed above the market price. A sell limit is executed only at the limit price or higher (better), while the buy limit is executed at the limit price or lower (better).
Limited risk
A concept often used to describe the option buyer’s position. Because the option buyer’s loss can be no greater than the premium he pays for the option, his risk of loss is limited.
Limited risk spread
A bull spread in a market where the price difference between the two contract months covers the full carrying charges. The risk is limited because the probability of the distant month price moving to a premium greater than full carrying charges is minimal.
Line-bar chart
See Bar chart.
Liquidate
Refers to closing an open futures position. For an open long, this would be selling the contract. For a short position, it would be buying the contract back (short covering, or covering his short).
Liquidity (liquid market)
A market which allows quick and efficient entry or exit at a price close to the last traded price. The ability to liquidate or establish a position quickly is due to a large number of traders willing to buy and sell.
Locals
The floor traders who trade primarily for their own accounts. Although “locals” are speculators, they provide the liquidity needed by hedgers to transfer the risk of price change.
Long
One who has purchased futures contracts or the cash commodity, but has not taken any action to offset his position. Also, purchasing a futures contract. A trader with a long position hopes to profit from a price increase.
Long hedge
A hedger who is short the cash (needs the cash commodity) buys a futures contract to hedge his future needs. By buying a futures contract when he is short the cash, he is entering a long hedge. A long hedge is also known as a substitute purchase or an anticipatory hedge.
Long-the-basis
A person who owns the physical commodity and hedges his position with a short futures position is said to be long-the-basis. He profits from the basis becoming more positive (stronger); for example, if a farmer sold a January soybean futures contract at $6.00 with the cash market at $5.80, the basis is -.20. If he repurchased the January contract later at $5.50 when the cash price was $5.40, the basis would then be -.10. The long-the-basis hedger profited from the 10› increase in basis.
Low
The smallest price paid during the day or over the life of the contract.
