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A listing of common trading terms and their meanings.

At-the-Money Option
An option whose strike price is approximately equal to the current market price of the underlying futures contract.
Basis

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 or 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 the underlying futures contract at the strike price on or before the expiration date.

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.

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.

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.

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 and/or using an options contract 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.

Offset

Taking a second option position equal 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 a 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 a 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

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 and/or using an options contract to protect the sale price of a commodity one is planning to sell.