Scalper
A floor trader who buys and sells quickly to take advantage of small price fluctuations. Usually a scalper is ready to buy at the bid and sell at the asked price, providing liquidity to the market. The term “scalper” is used because these traders attempt to “scalp” a small amount on a trade.
Security deposit
See Margin.
Segregated account
An account separate from brokerage firm accounts. Segregated accounts hold customer funds so that if a brokerage house becomes insolvent, the customers’ funds will be readily recognizable and will not be tied up in litigation for extended periods of time.
Selective hedging
The technique of hedging where the futures or option position may be lifted and re-entered numerous times before the cash market transaction takes place. A hedge “locks-in” a target price to minimize risk. Lifting the hedge lifts the risk protection (increasing the possibility of loss), but also allows the potential for gain.
Sell stop order
See Stop orders.
Selling hedge
See Short hedge.
Settlement
The clearinghouse practice of adjusting all futures accounts daily according to gain or loss from price movement is generally called settlement.
Settlement price
Established by the clearinghouse from the closing range of prices (the last 30 seconds of the day). The settlement price is used to determine the next day’s allowable trading range, and to settle all accounts between clearing members for each contract month. Margin calls and invoice prices for deliveries are determined from the settlement prices. In addition to this, settlement prices are used to determine account values and determine margins for open positions.
Short
Someone who has sold actuals or futures contracts, and has not yet offset the sale; the act of selling the actuals or futures contracts, absent any offset.
Short covering
Buying by shorts to liquidate existing positions.
Short hedge
When a hedger has a long cash position (is holding an inventory or growing a crop) he enters a short hedge by selling a futures contract. A sell or short hedge is also known as a substitute sale.
Short-the-basis
When a person or firm needs to buy a commodity in the future, he can protect himself against price increases by making a substitute purchase in the futures market. The risk this person now faces is the risk of a change in basis (cash price – futures price). This hedger is said to be short-the-basis because he will profit if the basis becomes more negative (weaker); for example, if a hedger buys a corn futures contract at 325› when cash corn is 312›, the basis is -.13. If this hedge is lifted with futures at 320› and cash at 300›, the basis is -.20, and the hedger has profited by the $.07 decrease in basis.
Sideways
A market with a narrow price range; i.e., little upward or downward price movement.
Special account
An account which has a reportable position in either futures or futures options. See also Reporting level.
Speculation
An attempt to profit from commodity price changes through the purchase and/or sale of commodity futures. In the process, the speculator assumes the risk that the hedger is transferring, and provides liquidity in the market.
Speculator
One who buys and sells stocks, land, etc., risking his capital with the goal of earning a profit from price changes. In contrast to gamblers, speculators understand and evaluate existing market risks on the basis of data and experience, while gamblers are those who seek out man-made risks or “invest” in a roll of the dice.
Spot
The market in which commodities are available for immediate delivery. It also refers to the cash market price of a specific commodity.
Spread
l) Positions held in two different futures contracts, taken to profit from the change in the difference between the two contracts’ prices; e.g., long a January Soybean contract and short a March Soybean contract would be a bull spread, used to profit from a narrowing in the difference between the two prices; 2) The difference between the prices of two futures contracts. If January beans are $6.15 and March beans are $6.28, the spread is -.13 or 13› under ($6.15 – 6.28 = -.13).
Spreading
The purchase of one futures contract and the sale of another in an attempt to profit from the change in price differences between the two contracts. Inter-market, intercommodity, inter- delivery, and commodity product are examples of spreads.
Stock index futures
Based on stock market indexes, including Standard and Poor’s 500, Value Line, NYSE Composite, Nikkei 225, the Major Market Index, and the Over-the-Counter Index, these instruments are used by investors concerned with price changes in a large number of stocks, or with major long-term trends in the stock market indexes. Stock index futures are settled in cash and are generally quoted in ticks of .05. To determine the contract value, the quote is generally multiplied by $500.
Stop orders
An order which becomes a market order once a certain price level is reached. These orders are often placed with the purpose of limiting losses. They also are used to initiate positions. Buy stop orders are placed at a price above the current market price. Sell stop orders are placed below the market price; for example, if the market price for December corn is 320›, a buy stop order could be placed at 320› or higher, and a sell stop could be placed at 319_› or lower. A buy stop order is activated by a bid or trade at or above the stop price. A sell stop is triggered by a trade or offer at or below the stop price.
Stopped out
When a stop order is activated and a position is offset, the trader has been “stopped out.”
Storage
The cost to store commodities from one delivery month to another. Storage is one of the “carrying charges” associated with futures.
Straddle
For futures, the same as spreading. In futures options, a straddle is formed by going long a call and a put of the same strike price (long straddle), or going short a call and a put of the same strike price (short straddle).
Strangle spread
Makes maximum use of the premium’s time value decay. To utilize a strangle most profitably, choose a market that is trading within a given range (volatility peaking), and sell an out-of-the-money call and an out-of-the-money put.
Strike price
The specified price at which an option contract may be exercised. If the buyer of the option exercises (demands performance), the futures contract positions will be entered at the strike price.
Strong basis
A relatively small difference between cash prices and futures prices. A strong basis also can be called a “narrow basis,” or a “more positive basis”: for example, a strong basis usually occurs in grains in the spring before harvest when supplies are low. Buyers must raise their bids to buy. As the cash prices rise, relative to futures prices, the basis strengthens. A strong basis indicates a good selling market, but a poor buying market.
Supply
The quantity of a good available to meet demand. Supply consists of inventories from previous production, current production, and expected future production. Because resources are scarce, supply creates demand. Only price must be determined.
Support
A horizontal price range where price hovers due to buying pressure before attempting a downward move.
Surplus fund
A fund established by an exchange for the protection of customers’ monies; a portion of all clearing fees are set aside for this fund.
Swap
A contract to buy and sell currencies with spot (cash and carry) or forward contracts. The contract provides for the buying and selling to occur at different times; thus, each party acquires a currency it needs for a predetermined period of time at a predetermined price, and locks in a sales price for the currency as well.
Symbols
Letters used to designate which futures or options price and which contract month is desired. Symbols are used to access quotes from various quote systems.
Synthetic position
A hedging strategy combining futures and futures options for price protection and increased profit potential; for example, by buying a put option and selling (writing) a call option, a trader can construct a position that is similar to a short futures position. This position is known as a synthetic short futures position, and shows a profit if the futures prices decline, and receives margin calls if prices rise. Synthetic positions are a form of arbitrage.
Systematic risk
The risk affecting a market in general; for example, if the government’s monetary and fiscal policies create inflation, price levels rise, affecting the entire market in much the same way, thus creating a systematic risk. Stock index futures can be used to substantially reduce systematic risk. Compare with unsystematic risk.
