Pit

The area on the trading floor of an exchange where futures trading takes place. The area is described as a “pit” because it is octagonal with steps descending into the center. Traders stand on the various steps, which designate the contract month they are trading. When viewed from above, the trading area looks like a pit.

Pit broker

A person on the exchange floor who trades futures contracts for others in the pits. See also Floor broker.

Pit trader

See Floor trader.

Point

See Minimum price fluctuation.

Point and figure chart

A graphic representation of price movement using vertical rows of “x”s to indicate significant up ticks and “o”s to reflect down ticks. Such charts do not reveal minute price fluctuations, only trends once they have established themselves.

Point balance

Prepared by an FCM, a point balance is a statement indicating profit or loss on all open contracts by computing them to an official closing or settlement price.

Pool

See Commodity pool.

Portfolio

The group of investments held by an investor.

Position

Open contracts indicating an interest in the market, be it short or long.

Position limit

The maximum number of futures contracts permitted to be held by speculators or spreaders. The CFTC establishes some position limits, while the exchanges establish others. Hedgers are exempt from position limits.

Position trader

A trader who establishes a position (either by purchasing or selling) and holds it for an extended period of time.

Power of attorney

An agreement establishing an agent-principal relationship. The “power of attorney” grants the agent authority to act on the principal’s behalf under certain designated circumstances. In the futures industry, a power of attorney must be in writing and is valid until revoked or terminated.

Premium

The price paid by a buyer to purchase an option. Premiums are determined by “open outcry” in the pits.

Price

A fixed value of something. Prices are usually expressed in monetary terms. In a free market, prices are set as a result of the interaction of supply and demand in a market; when demand for a product increases and supply remains constant, the price tends to decline. Conversely, when the supply increases and demand remains constant, the price tends to decline; if supply decreases and demand remains constant, prices tend to rise. Today’s markets are not purely competitive; prices are affected by government controls and supports that create artificial supplies and demand, and inhibit free trade, thus making price predictions more difficult for those not privileged with inside government information.

Price discovery mechanism

The method by which the price for a particular shipment of a commodity is determined. Factors taken into account include quality, delivery point, and the size of the shipment. For example, if the price of corn is $3.50 per bushel on the CBOT, the local price of corn per bushel can be discovered by taking into consideration the distance from Chicago that corn would have to be shipped, the difference in quality between local and Chicago corn, and the amount of corn to be transported. Once these factors are considered, both the buyer and seller can arrive at a reasonable price for their area.

Price limit

The maximum price rise or decline permitted by an exchange in its commodities. The limit varies from commodity to commodity and may change depending on price volatility (variable price limits). Not all exchanges have limits; those that do set their limits relative to the prior day’s settlement, for example, the CBOT may set its limit at 10 > for corn. On day 2, corn may trade up or down 10› from the previous day’s close of $3.00 per bushel; i.e., up to $3.10 or down to $2.90 per bushel.

Price weighted index

A stock index weighted by adding the price of 1 share of each stock included in the index, and dividing this sum by a constant divisor. The divisor is changed when a stock split or stock dividend occurs because these affect the stock prices. The MMI is a price weighted index.

Primary markets

The principal market for the purchase and sale of physical commodities.

Purchase and sale statement

A form required to be sent to a customer when a position is closed; it must describe the trade, show profit or loss and the commission.

Purchaser

Anyone who enters the market as a buyer of a good, service, futures contract, call, or put.

Pure hedging

A technique used by a hedger who holds his futures or option position without exiting and re-entering the position until the cash commodity is sold. Pure hedging also is known as conservative or true hedging, and is used largely by inexperienced traders wary of price fluctuation, but interested in achieving a target price.

Put

An option contract giving the buyer the right to sell something at a specified price within a certain period of time. A put is purchased in expectation of lower prices. If prices are expected to rise, a put may be sold. The seller receives the premium as compensation for accepting the obligation to accept delivery, if the put buyer exercises his right to sell. See also Limited risk.

Pyramiding

Purchasing additional contracts with the profits earned on open positions.