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Glossary of Trading Terms

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See Cash Commodities.


The policy under which all futures positions owned or controlled by one trader or a group of traders are combined to determine reportable positions and speculative limits.

American Style Option

A call or put option contract that can be exercised at any time before the expiration of the contract. Most exchange listed options are American style options.


The simultaneous purchase and sale of similar commodities in different markets to take advantage of a price discrepancy.


The process of settling disputes between parties by a person or persons chosen or agreed to by them. The National Futures Association’s arbitration program provides a forum for resolving futures-related disputes between NFA Members or between Members and customers.


When an option is exercised by the holder of that option, the option is assigned to the writer of that option. The writer of a Call option is obligated to sell stock at the striking price of the Call option; the writer of a Put option is obligated to buy stock at the striking price of the Put option.

Associated Person (AP)

An individual who solicits orders, customers or customer funds on behalf of a Futures Commission Merchant, an Introducing Broker, a Commodity Trading Advisor or a Commodity Pool Operator and who is registered with the Commodity Futures Trading Commission.

At the money (ATM)

An option whose strike price is approximately the same as the current price of the underlying stock or future. For example, with IBM trading at $110, both the $110 call options and $110 put options are at the money.

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A futures market in which the relationship between two delivery months of the same commodity is abnormal. The opposite of Contango.

Bar Chart

A bar chart is a price chart that depicts each trading period month, week, day, hour, minute, etc.) as a vertical line (“bar”) ranging from the low price to the high price. Most bar charts also include two small hash marks on either side of the bar: one on the left that denotes the opening price and one on the right that denotes the closing price.


The difference between the current cash price of a commodity and the futures price of the same commodity.

Bear Call Spread

Net credit transaction. Maximum loss = difference between the strike less the credit. Maximum profit = credit. Requires margin.

Bear Market (Bear / Bearish)

A market in which prices are declining. A market participant who believes prices will move lower is called a “bear”. A news item is considered bearish if it is expected to result in lower prices.

Bear Put Spread

Net debit transaction. Maximum loss = debit. Maximum profit = difference between the strikes less the debit. No margin required.

Bear Spread

A one-to-one spread established by selling a lower strike option series and buying a higher strike option series. Both option series are on the same underlying asset, are of the same type, and expire in the same month.


The highest price anyone is willing to pay for a security.

Board of Trade

See Contract Market.


Fischer Black and Myron Scholes: the inventors of a formula to compute the values of European style call and put options.


A breakout occurs when price bursts out of a congestion pattern like a trading range, flag or pennant, or through some other support or resistance level. Sometimes “breakout” is used to describe upside moves only, while “breakdown” is used to describe downside breakouts.


A company or individual that executes futures and options orders on behalf of financial and commercial institutions and/or the general public.


Directly or indirectly taking the opposite side of a customer’s order in the broker’s own account or into an account in which the broker has an interest, without open and competitive execution of the order on an exchange.

Bull Call Spread

Net debit transaction. Maximum loss = debit. Maximum profit = difference between strikes less the debit. No margin required.

Bull Market (Bull / Bullish)

A market in which prices are rising. A market participant who believes prices will move higher is called a “bull”. A news item is considered bullish if it is expected to result in higher prices.

Bull Put Spread

Net credit transaction. Maximum profit = credit. Maximum loss = difference between the strikes less the credit. Required margin.

Bull Spread

A one-to-one spread established by buying a lower strike option series and selling a higher strike option series. Both options series are on the same underlying asset, are of the same type, and expire in the same month.

Butterfly Spread

A long butterfly usually refers to the sale of two contracts on one option series and the purchase of one contract of a lower option series and one contract of a higher series. All contracts are on the same underlying asset, are of the same type, and expire in the same month. A long butterfly is also the result of combining a short straddle with a long strangle, or of combining a bull spread with a bear spread.

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Call or Call Option

An option which gives the buyer the right, but not the obligation, to purchase (“go long”) the underlying contract at the strike price on or before the expiration date.

Candlestick Chart

A price chart that uses rectangles that range from the opening price to the closing price of each trading session. The rectangle is dark (usually black) if the closing price is lower than the opening price (a down day), or light (usually white) if the close is higher than the open (an up day). Candlestick charts, which originated in Japan, are very similar to bar charts, although they pre-date them by a number of years.

The high and low price extremes extend as vertical lines above or below these rectangles, forming “wicks” to the bodies of the candles represented by the rectangles. Of course, if the high and low of the day are identical to the open and close, no wicks will exist; conversely, if the open and close are the same price, no rectangle (body) will exist. Like bar charts, candlestick charts can be constructed on any time frame.

Carrying Broker

A member of an exchange, usually a clearinghouse member, through which another firm, broker, or customer chooses to clear all or some trades.

Carrying Charge

With regards to Futures, the cost of storing a physical commodity, such as grain or metals, over a period of time. The carrying charge includes insurance, storage and interest on the invested funds as well as other incidental costs. In interest rate futures markets, it refers to the differential between the yield on a cash instrument and the cost of the funds necessary to buy the instrument. Also referred to as Cost of Carry.

Cash Commodity

The actual physical commodity as distinguished from the futures contract based on the physical commodity. Also referred to as Actuals.

Cash Market

A place where people buy and sell the actual commodities (i.e. grain elevator, bank, etc.) See also Forward (Cash) Contract and Spot.

Cash Settlement

A method of settling certain futures or options contracts whereby the market participants settle in cash (rather than the delivery of the commodity).


The use of graphs and charts in the technical analysis of futures markets to plot price movements, volume, open interest or other statistical indicators of price movement. See also Technical Analysis.


Excessive trading that results in the broker deriving a profit from commissions while disregarding the best interests of the customers.

Circuit Breaker

A system of trading halts and price limits on equities and derivatives markets designed to provide a cooling-off period during large, intraday market declines.


The process by which a clearinghouse maintains records of all trades and settles margin flow on a daily mark-to-market basis for its clearing members.


An agency or separate corporation of an exchange that is responsible for settling trading accounts, collecting and maintaining margin monies, regulating delivery and reporting trade data. The clearinghouse becomes the buyer to each seller (and the seller to each buyer) and assumes responsibility for protecting buyers and sellers from financial loss by assuring performance on each contract.

Clearing Member

A member of an exchange clearinghouse responsible for the financial commitments of its customers. All trades of a non-clearing member must be registered and eventually settled through a clearing member.

Close (or Closing Price)

The final trade price of the day (or other time period). In futures markets, the close is a representative price of the last minute of trading. In stocks, the close is the last recorded trade price.

Closing Range

A range of prices at which transactions took place during the close of the market.

Closing Transaction

To sell a previously purchased option or to buy back a previously written option, effectively canceling out the position.


This is the legally required amount of cash of securities deposited with a brokerage to insure that an investor can meet all potential obligations. Collateral is required on investments with open-ended loss potential, such as writing naked Calls or Puts.


This is the charge paid to a broker for transacting the purchase of the sale of stock, options, or any other security.

Commission House

See Futures Commission Merchant.

Commodity Exchange Act (CEA)

The federal act that provides for federal regulation of futures trading

Commodity Futures Trading Commission (CFTC)

The federal regulatory agency established in 1974 that administers the Commodity Exchange Act. The CFTC monitors the futures and options on futures markets in the United States.

Commodity Pool

An enterprise in which funds contributed by a number of persons are combined for the purpose of trading futures or options contracts. The concept is similar to a mutual fund in the securities industry. Also referred to as a Pool.

Commodity Pool Operator

An individual or organization which operates or solicits funds for a commodity pool. A CPO is generally required to be registered with the CFTC.

Commodity Trading Advisor (CTA)

A person who, for compensation or profit, directly or indirectly advises others as to the advisability of buying or selling futures or commodity options. Providing advice includes exercising trading authority over a customer’s account. A CTA is generally required to be registered with the CFTC.


A type of butterfly where instead of selling two options of the same series, two adjacent option series are sold. See Butterfly Spread.

Confirmation Statement

A statement sent by a Commission Merchant to a customer when a position has been initiated. The statement shows the price and the number of contracts bought or sold. Sometimes combined with a Purchase and Sale Statement.


Congestion refers to a period of non-trending or sideways price movement, often in a narrow range (or an increasingly narrow range, as in the case of triangles and pennants). See also Trading Range.


A futures market in which prices in succeeding delivery months are progressively higher. The opposite of Backwardation.

Continuation Pattern

A continuation pattern is price action that interrupts a trend and implies a continuation of the trend (rather than a trend reversal) when the pattern is complete. Triangles, pennants, and flags are examples of continuation patterns.

Contract Market

A board of trade designated by the CFTC to trade futures or options contracts on a particular commodity. Commonly used to mean any exchange on which futures are traded. Also referred to as an Exchange.

Contract Size

The number of units of an underlying asset bought by exercising a call option or sold by exercising a put option. In the case of stock options the contract size is 100 shares of the underlying asset. In the case of options on futures contracts the contract size is one underlying futures contract. In the case of index options the contract size underlying asset is an amount of cash equal to parity times the multiplier. In the case of currency options it varies.

Contract Month

The month in which delivery is to be made in accordance with the terms of the contract. Also referred to as Delivery Month.


The tendency for prices of physical commodities and futures to approach one another, usually during the delivery month.


A correction is a shorter-term countertrend move. See also Pullback.

Cost of Carry

The interest cost of holding an asset for a period of time. This is either the cost of borrowing funds to finance the purchase, in which case it is called the real cost, or it is the loss of income because funds are diverted from one investment to another, in which case it is called the opportunity cost.


A short option is considered covered if there is a corresponding offsetting position in the underlying security or another option where no margin requirement results from the short option.


For example, hedging a cash commodity using a different but related futures contract when there is no futures contract for the cash commodity being hedged and the cash and futures market follow similar price trends (e.g. using soybean meal futures to hedge fish meal).


John Cox, Stephen Ross and Mark Rubenstein: the inventors of the binomial option pricing model.

Cup-and-Handle Pattern

A cup-and-handle is a reversal pattern formed when a market makes a rounded bottom (the “cup”), begins to rally, pulls back (the “handle”), and resumes the uptrend. See also Running Cup-and-Handle.

Customer Segregated Funds

See Segregated Account.

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Daily Range

The daily range is the difference between the high price of the day and the low price of the day.

Day Order

An order that, if not executed, expires automatically at the end of the trading session on the day it was entered.

Day Trader

A speculator who will normally initiate and offset a position within a single trading session.


The failure to perform, for example, on a futures contract as required by exchange rules, such as a failure to meet a margin call or to make or take delivery.

Deferred Delivery Month

The distant delivery months in which trading is taking place, as distinguished from the nearby delivery month.


This is the theoretical rate of change of an option’s price relative to the price of its underlying, times the contract multiplier. Delta is positive for calls and negative for puts. An option with a delta of 25 will move 25% as much as the underlying asset. The delta of an option changes with the distance of the strike from the underlying. Delta also measures the equivalent unhedged position in the underlying asset.


For example, the transfer of the cash commodity from the seller of a futures contract to the buyer of a futures contract. Each futures exchange has specific procedures for delivery of a cash commodity. Some futures contracts, such as stock index contracts, are cash settled.

Delivery Month

See Contract Month.


A financial instrument, traded on or off an exchange, the price of which is directly dependent upon the value of one or more underlying securities, equity indices, debt instruments, commodities, other derivative instruments, or any agreed upon pricing index or arrangement. Derivatives involve the trading of rights or obligations based on the underlying product but do not directly transfer property. They are used to hedge risk or to exchange a floating rate of return for a fixed rate of return.

Designated Self-Regulatory Organization (DSRO)

When a Futures Commission Merchant (FCM) is a member of more than one Self-Regulatory Organization (SRO), the SROs may decide among themselves which of them will be primarily responsible for enforcing minimum financial and sales practice requirements. The SRO will be appointed DSRO for that particular FCM. NFA is the DSRO for all non-exchange member FCMs. See also Self-Regulatory Organization.

Disclosure Document

The statement that must be provided to prospective customers that describes trading strategy, fees, performance, etc.


With regards to Futures: (1) The amount a price would be reduced to purchase a commodity of lesser grade; (2) sometimes used to refer to the price differences between futures of different delivery months, as in the phrase “July is trading at a discount to May,” indicating that the price of the July future is lower than that of May; (3) applied to cash grain prices that are below the futures price.

Discretionary Account

An arrangement by which the owner of the account gives written power of attorney to someone else, usually the broker or advisor, to buy and sell without prior approval of the account owner. Also referred to as a Managed Account.


A divergence occurs when two markets, or a market and a benchmark index, or a market and an indicator move in opposite directions. Common examples include one stock index (e.g., the Dow Industrials) moving higher while another stock index (e.g., the Dow Transports) moves lower, or when price makes a new high and a momentum oscillator (like the RSI or stochastics) makes a lower high.

The implication is that by moving in the opposite direction, the indicator (or secondary market or index) is not confirming the price move in the market from which it is diverging. Corrections or reversals sometimes result in such circumstances.

Note: Oscillators often produce multiple divergence signals in strongly trending markets before the trend actually reverses; view such signals conservatively.

Double Bottom

A double bottom is a reversal pattern consisting of two price troughs: The market declines to a new low, retraces, then falls again to the approximate price level of the first trough and retraces again. The implication is that by failing to break below the first price low, the market is hitting support and the down trend (especially if it has been an extended one) could reverse.

Double Top

A double top is a reversal pattern consisting of two price peaks: The market rallies to a new high, retraces, then rallies again to the approximate price level of the first peak and retraces again. The implication is that by failing to penetrate the first price peak, the market is hitting resistance and the up trend (especially if it has been an extended one) could reverse.

Dual Trading

Dual trading occurs when (1) a floor broker executes customer orders and, on the same day, trades for his own account or an account in which he has an interest; or (2) a Futures Commission Merchant carries customer accounts and also trades, or permits its employees to trade, in accounts in which it has a proprietary interest, also on the same day.

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Earnings Per Share

After-tax profits divided by the number of outstanding shares. This is one of the most important fundamental measures of a stock’s prospects for future price gains.

Electronic Order

An order placed electronically (without the use of a broker) either via the Internet or an electronic trading system.

Electronic Trading Systems

Systems that allow participating exchanges to list their products for trading after the close of the exchange’s open outcry trading hours (i.e., Chicago Board of Trade’s Project A, Chicago Mercantile Exchange’s GLOBEX and New York Mercantile Exchange’s ACCESS.)


For example, the value of a futures trading account if all open positions were offset at the current market price.

European Style Option

A call or put option that can only be exercised at the expiration of the contract.


See Contract Market.

Exchange for Physicals (EFP)

A transaction generally used by two hedgers who want to exchange futures for cash positions. Also referred to as Against Actuals or Versus Cash.

Expansion Breakout/Breakdown

A pattern from Jeff Cooper’s book “Hit and Run Trading” that occurs when a new (two-month) high or low is made on a price bar with the largest daily range of the last nine days. See also “Breakout.”


This is the actual fulfillment of the terms of the options contract. The specified number of units of the underlying are bought or sold at the price predetermined in the option contract.

Exercise Price

See Strike Price.


Means without dividends. Stocks purchased on the ex-dividend date are purchased without rights to the recent dividend. Owners of the stock are entitled to all future dividends.


The demand of the owner of a call option that the contract size number of units of an underlying asset be delivered to him at the exercise price. The demand by the owner of a put option contract that the contract size number of units of an underlying asset be bought from him at the exercise price.

Exercise Price

The price at which the owner of a call option contract can buy an underlying asset. The price at which the owner of a put option contract can sell an underlying asset.


This is the date the option contract becomes void unless previously exercised. All stock and index option contracts expire on the Saturday following the third Friday of the expiration month.

Extrinsic Value

See Time Value.

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Fair Value

This is the mathematically calculated value of an option. It is determined by (1) the strike price of the option, (2) the current price of the underlying, (3) the amount of time left until expiration, (4) the volatility of the underlying, and (5) dividends.

Far Term

Expiration months further from expiration.

A mathematical series in which each consecutive number is the sum of the two preceding numbers: 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc.

Fibonacci Series

As the series progresses, the ratio of a Fibonacci number divided by the immediately preceding number comes closer and closer to 1.618, the “golden mean,” a ratio found in many natural phenomena as well as man-made objects like the Parthenon and the Great Pyramid. (The inverse, .618, has a similar significance.) Traders use various permutations of Fibonacci numbers to project retracement levels, among other things.

Fill or Kill

Fill or kill (FOK). Trade orders that are canceled if they are not filled almost immediately (typically after being bid or offered three times), i.e., “If it doesn’t get filled, it gets killed.”

First Notice Day

The first day on which notice of intent to deliver a commodity in fulfillment of an expiring futures contract can be given to the clearinghouse by a seller and assigned by the clearinghouse to a buyer. Varies from contract to contract.


A short-term congestion pattern (perhaps one to three weeks on a daily chart) that appears as a small consolidation within a trend. The upper and lower boundaries of the flag should be contained in horizontal trendlines; if the lines converge, forming a small triangle, the pattern is referred to as a “pennant.”

Floor Broker

An individual who executes orders on the trading floor of an exchange for any other person.

Floor Trader

An individual who is a member of an exchange and trades for his own account on the floor of the exchange.

Follow-Up Action

This is the term used to describe the trades an investor makes subsequent to implementing a strategy. Through these trades, the investor transforms one option strategy into a different one in response to price changes in the underlying.

Forward (Cash) Contract

A contract which requires a seller to agree to deliver a specified cash commodity to a buyer sometime in the future. All terms of the contract are customized, in contrast to futures contracts whose terms are standardized. Forward contracts are not traded on exchanges.


A process whereby a futures or options position is taken based on non-public information about an impending transaction in the same or related futures or options contract.

Fully Disclosed

An account carried by a Futures Commission Merchant in the name of an individual customer; the opposite of an Omnibus Account.

Fundamental Analysis

A method of anticipating future price movement using supply and demand information.

Futures Commission Merchant (FCM)

An individual or organization which solicits or accepts orders to buy or sell futures contracts or commodity options and accepts money or other assets from customers in connection with such orders. An FCM must be registered with the CFTC.

Futures Contract

A legally binding agreement to buy or sell a commodity or financial instrument at a later date. Futures contracts are standardized according to the quality, quantity and delivery time and location for each commodity. The only variable is price.

Futures Industry Association (FIA)

The national trade association for Futures Commission Merchants.

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Gamma expresses how fast delta changes with a one point increase in the price of the underlying. Gamma is positive for all options. If an option has a delta of 45 and a gamma of 10, then the option’s expected delta will be 55 if the underlying goes up one point. If we consider delta to be the velocity of an option, then gamma is the acceleration.


When the low of the current price bar is higher than the high of the preceding price bar, or the high of the current price bar is lower than the low of the preceding price bar.

Some traders also use the term gap to refer to an opening price that is higher than the high (or lower than the low) of the preceding price bar (an “opening” gap).


“Generals” refers to the major buy side institutions such as Mutual Funds.

Good-till-canceled (GTC) Order

A trade order that remains open until you cancel it (in practice, for perhaps 60 days; check with your broker); there is no need to re-enter it day after day.


A person who sells an option and assumes the obligation to sell (in the case of a call) or buy (in the case of a put) the underlying futures contract at the exercise price. Also referred to as an Option Seller or Writer.

Guaranteed Introducing Broker

A firm or individual that solicits and accepts commodity futures orders from customers but does not accept money, securities or property from the customer. A Guaranteed Introducing Broker has a written agreement with a Futures Commission Merchant that obligates the FCM to assume financial and disciplinary responsibility for the performance of the Guaranteed Introducing Broker in connection with futures and options customers. Therefore, unlike and Independent Introducing Broker, a Guaranteed Introducing Broker must introduce all accounts to its guarantor FCM but is not subject to minimum financial requirements. All Introducing Brokers must be registered with the CFTC.


A strangle made up of in-the-money options with the underlying centered between the strikes.

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Head-and-shoulders Pattern

A reversal pattern consisting of three price peaks (in the case of a head-and-shoulders top) where the middle peak (the “head”) is higher than the peaks on either side of it (the shoulders). A head-and-shoulders bottom is simply the inverse of this pattern.


The practice of offsetting the price risk inherent in any cash market position by taking an equal but opposite position in the (i.e. futures) market. A long hedge involves buying futures contracts to protect against possible increasing prices of commodities. A short hedge involves selling futures contracts to protect against possible declining prices of commodities.


The highest price of the day for a particular contract.

High-level Pattern

A pattern that develops near the top of the recent trading range. For example, a consolidation that occurs at the top of an up trend could be called a “high-level consolidation.”

Historical Volatility

The degree of movement in a market over a past time period, typically 100 days. It is normally expressed as an annualized percentage. A 100-day historical volatility of 32%, for instance, means that over the last 100 days the market has fluctuated in such a way that it would be expected to fluctuate about 32% in a year’s time. If the market is currently priced at exactly 100, one would expect to see values between 68 (100-32% of 100) and 132 (100+ 32% of 100).


The purchaser of either a call or a put option. Option buyers receive the right, but not the obligation, to assume a position. The opposite of a Grantor. Also referred to as the Option Buyer.

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Implied Volatility

The Implied Volatility of an option is a calculated value of the options pricing model. To calculate the implied volatility, an investor would use the last sale (bid price or asked price) as the theoretical value of the option and solve the model to determine what volatility would have been required to calculate that value.

In the Money (ITM)

An option whose strike price is below the current price of the underlying stock or future (for call options) or above the current price of the underlying stock or future (for put options). With IBM trading at $110, both the $100 call options and $120 put options are in the money.

Independent Introducing Broker

A firm or individual that solicits and accepts commodity futures orders from customers but does not accept money, securities or property from the customer. Unlike a Guaranteed Introducing Broker, an Independent Introducing Broker is subject to minimum capital requirements and can introduce accounts to any registered Futures Commission Merchant.

Initial Margin

The amount a market participant must deposit into a margin account at the time an order is placed to buy or sell a contract.

Inside Day

A day with a higher low and lower high than the preceding price bar.

Intrinsic Value

The intrinsic value of an option is what its premium would be if the price of the underlying would remain at its current level until expiration. For an in-the-money option, it is the difference between it’s striking price and the price of the underlying. The intrinsic value of an at-the-money or out-of-the-money option is zero dollars.

Introducing Broker (IB)

See Guaranteed Introducing Broker and Independent Introducing Broker.

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No entries for J.

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Key Reversal

A one-day reversal pattern that occurs when a market makes a new high (or low), preferably a spike high (or low), and then reverses to close at or near the low (or high) of the price bar. The implication is that the market has experienced an extreme intraday sentiment change and a reversal is likely.

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Last Trading Day

The last day on which trading may occur in a given futures or option.


This is the term used to describe a risky method of implementing or closing out a Spread strategy one side (“leg”) at a time. Instead of utilizing a “spread order” to insure that both the written and the purchased options are filled simultaneously, the investor gambles that a slightly better deal can be obtained on the price of the Spread by implementing it as two separate orders.


The ability to control large dollar amounts of a commodity with a comparatively small amount of capital.

Limit Move

The largest one-day price move allowed in a future contract, up or down. During limit up and limit down days, it is impossible for traders to trade at a price above a limit up move or at a price below a limit down move.

Limit Order

A trade order with a specified execution price, e.g., “Buy 100 shares of Microsoft at 147 3/4,” or, “Sell 10 June T-bonds at 118 17/32 limit.” Your broker cannot pay more than 147 3/4 for your shares or sell for less than 118 17/32 for your contracts.

A standard limit order is good for the remainder of the day it is entered unless you give specific instructions to cancel the order. At the end of the day, your broker will cancel the order automatically, and you will have to place it again the next day if necessary.


For example, to take a second futures or options position opposite to the initial or opening position. TO sell (or purchase) futures contracts of the same delivery month purchased (or sold) during an earlier transaction or make (or take) delivery of the cash commodity represented by the futures market. Also referred to as Offset.


The amount of trading activity, and thereby the ease with which you can get in and out of a market. Measured by volume (and open interest in the case of futures markets).


A member of an exchange who trades for his own account or fills orders for customers.


Purchasing an asset with the intention of selling it at some time in the future. An asset is purchased long given the expectation of an increase in its price.


The lowest price of the day for a particular contract.

Low-level Pattern

A pattern that develops near the bottom of the recent trading range. For example, a consolidation that occurs at the bottom of a downtrend could be called a “low-level consolidation.”

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Maintenance Margin

A set minimum margin (per outstanding futures contract) that a customer must maintain his margin account to retain the futures position.

Managed Account

See Discretionary Account.

Managed Funds Association (MFA)

The trade association for the managed funds industry.


See Collateral.

Margin Call

A call from a clearinghouse to a clearing member, or from a broker or firm to a customer, to bring margin deposits up to a required minimum level.


To debit or credit on a daily basis a margin account based on the close of that day’s trading session. In this way, buyers and sellers are protected against the possibility of contract default.

Market Order

A trade order executed immediately at the best possible price currently available, that is, “at the market.” If you wanted to buy Microsoft using a market order, you could tell your broker, “Buy 100 shares of Microsoft at the market.”

Market-on-close (MOC)

Trade orders executed as market orders, but only during the closing of a particular market.

Market-on-open (MOO)

Trade orders executed as market orders, but only during the opening of a particular market.

Marking a Position to Market

The act of comparing the historic cost of a position to its current market value.

Maximum Price Fluctuation

See Price Limit.

McClellan Oscillator

The McClellan oscillator measures the momentum of market breadth by calculating the difference between the 40- and 20-day exponential moving averages of daily advancing issues minus declining issues on the New York Stock Exchange (NYSE).

The idea behind the indicator is that more stocks will advance than decline in bull markets and vice-versa in bear markets. Generally, markets are considered oversold when the oscillator is below -100, and overbought when it is above +100.

The McClellan oscillator is not a stand-alone indicator. It measures the trend strength of advancing and declining issues, and not necessarily market turns. Leadership in a handful of stocks has characterized many bull markets, defying the premise that the broad market must advance for stock indexes to hit new highs.

Measured Move

A price projection based on previous price swings. The idea is that different legs of a price move will be roughly the same length.

For example, if a stock trading at 100 rallies 20 points to 120, then pulls back 5 points to 115, a measured move projection would set a price objective of 135 if and when the rally resumes–another 20 point move from the low of the pullback.


A voluntary process in which the parties to a futures-related dispute work with a neutral third party to find a mutually acceptable solution.

Minimum Price Fluctuation

See Tick.


As a general term, momentum refers to the speed or strength of price movement. It also is the name of a specific technical study that measure the difference between today’s closing price and the closing price N days ago. See also Rate of Change.

Moving Average

Moving averages are calculations that smooth price action to reveal the underlying trend. The following discussion uses daily closing prices to illustrate various moving average calculations. There are several types of moving averages. The most basic is the simple moving average (SMA), which is the sum of closing prices over a particular period divided by the number of days in that period.

For example, a five-day simple moving average would be the sum of the closing prices of the five most recent trading days, divided by five; a 20-day moving average would be the sum of the 20 most recent closing prices divided by 20, and so on. Each day the most recent closing price is added to the equation and the most distant day is dropped off.

A weighted moving average (WMA), the most simple of which is referred to as a linearly weighted moving average, multiplies closing prices by a weighting factor that emphasizes recent price action. The oldest price in the calculation is multiplied by 1, the second oldest by 2, the third oldest by 3, etc.

For example, a standard five-day weighted moving average would multiply the closing price of the fifth most recent trading day (five trading days ago) by one, the fourth most recent trading day by two, the third most recent trading day by three, the second most recent trading day by four, and the most recent trading day by five. These products would be summed and then divided by the sum of the weighting factors (in this case, 1 + 2 + 3 + 4 + 5 = 15) to derive the linearly weighted moving average value for the current day. Other weighting schemes can be used to increase or decrease the emphasis of more recent prices.

An exponential moving average (EMA) is actually a specific type of weighted moving average. It uses a constant (a smoothing factor) between 0 and 1 in the following manner: the current closing price (C) multiplied by the smoothing constant (S) added to the product of the previous day’s exponential moving average value (PEMA) and 1 minus the smoothing factor, or:

Today’s EMA = S*C + (1 – S)*PEMA

While the description and formula seems somewhat confusing, the approach is actually simpler to calculate than other moving averages because all you need is today’s closing price and yesterday’s EMA value.

Final notes: The preceding descriptions use daily closing prices. Moving averages can, of course, be constructed on intra-day, weekly or monthly time frames, and substituting the open, low, high or average price of a bar for the closing price.

One distinct type of moving average is the Adaptive Moving Average (AMA), which dynamically adjusts the number of days in the moving average calculation to current market volatility: In high volatility-periods the number of days would increase (making the average less sensitive and less prone to whipsaws), and in low-volatility periods the number of days would decrease (making the average more sensitive to smaller price swings).

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A naked option strategy is an uncovered option strategy. It is an investment in which options sold short are NOT matched with either a long position in the underlying or a long position in another option of the same type which expires at the same time or later than the options sold. The loss potential with naked writing is virtually unlimited.

Naked Option

See Uncovered Option.

National Futures Association (NFA)

Authorized by Congress in 1974 and designated by the CFTC in 1982 as a “registered futures association”, NFA is the industrywide self-regulatory organization of the futures industry.

National Introducing Brokers Association (NIBA)

NIBA is a non-profit organization for guaranteed and independent introducing brokers.

Near Term

Expiration month closest to expiration.

Nearby Delivery Month

The futures contract month closest to expiration. Also referred to as the Spot Month.

Net Asset Value

The value of each unit of participation in a commodity pool. Basically a calculation of assets minus liabilities plus or minus the value of open positions when marked to the market, divided by the total number of outstanding units.

Net Performance

An increase or decrease in net asset value exclusive of additions, withdrawals and redemptions.

Notice Day

Any day on which a clearinghouse issues notices of intent to deliver on futures contracts.

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Offer (Asked)

The lowest price at which anyone is willing to sell a security.


See Liquidate.

Omnibus Account

An account carried by one Futures Commission Merchant (FCM) with another FCM in which the transactions of two or more persons are combined and carried in the name of the originating FCM rather than of the individual customers; the opposite of Fully Disclosed.

One-Eighties (180s)

A two-day reversal pattern for strongly trending stocks described by Jeff Cooper in his book Hit and Run Trading. For buys, on day one, the stock must close in the bottom 25% of its daily range. On day two, the stock must close in the top 25% of its range. The pattern is reversed for sells.

Open (or Opening Price)

The first trade price of the day (or other time period). In futures markets, the open is a representative price of the first minute of trading. In stocks, the open is the first recorded trade price.

Open Outcry

A method of public auction for making bids and offers in the trading pits of futures exchanges.

Open Trade Equity

The unrealized gain or loss on open positions.

Opening Range

The range of prices at which buy and sell transactions took place during the opening of the market.

Opening Transaction

The implementing of a new position.

Open Interest

The cumulative total of all option contracts of a particular series sold but not repurchased or exercised.

Option Buyer

See Holder.

Option Contract

A contract which gives the buyer the right, but not the obligation, to buy or sell a contract at a specific price within a specified period of time. The seller of the option has the obligation to sell the contract or buy it from the option buyer at the exercise price if the option is exercised. See also Call Option and Put Option.

Option Premium

The price of an option.

Option Seller

See Grantor.


A technical indicator that measures (usually) the velocity of shorter-term price action to determine whether a market is overbought or oversold. Well-known oscillators include the relative strength index (RSI) and stochastics. See also Momentum and Rate of Change.

Out Trade

A trade which cannot be cleared by a clearinghouse because the data submitted by the two clearing members involved in the trade differs in some respect. All out trades must be resolved before the the market opens on the next day.

Out of the Money (OTM)

A call option whose strike price is higher than the market price of the underlying security, or a put option whose strike price is lower than the market price of the underlying security.

Outside Day

A day with a high price higher than the previous day’s high and a low price lower than the previous day’s low.

Over-the-Counter Market (OTC)

A market where products such as stocks, foreign currencies and other cash items are bought and sold by telephone and other electronic means of communication rather than on a designated exchange.


When a market has presumably risen too far too fast and is due for at least a short-term correction. See Oscillator.


When a market has presumably fallen too far too fast and is due for at least a short-term correction. See Oscillator.

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Par refers to a price of 100, e.g., “Stock XYZ rallied over par today, closing at 101 5/8.”


A short-term congestion pattern (perhaps one to three weeks) that narrows into the form of a small triangle. (Pennants are essentially shorter duration triangle patterns.) See also Flag.


The area on the trading floor where trading is conducted by open outcry.


When a market is rallying and today’s low is lower than the low of the highest day in the rally, that high becomes a pivot, or swing high. When a market is declining and today’s high is higher than the high of the lowest day, then that low becomes a pivot, or swing low.

Point and Figure Chart

Point and figure chart. The point and figure chart differs from other price charts in that its time axis is not constant–prices are not plotted day by day or week by week, etc. Instead, point-and-figure charts use columns of ascending Xs and descending Os to portray up moves and down moves (of a certain magnitude), respectively, in a market.

For example, every X might represent a .5 point rise (referred to as the “box size”) in the stock’s price. Price declines would only be denoted by a column of Os if price fell, say, 1.5 points (three boxes, referred to as the “reversal amount”). In this case, if the stock rose from 25 to 25.5 to 26 to 26.5, you would add three Xs to your column of Xs, one for each .5 point rise from 25 to 26.5. If it rose only a quarter point or a half-point, or declined only a point, you would do nothing. Only when price dropped by 1.5 points or more would you stop adding ascending Xs and start a column of descending Os immediately to the right.

The larger the box size and reversal amount you use, the less sensitive your chart will be to smaller price fluctuations. Because a one-point move (or whatever increment you use for your box size) may occur in one hour or two days, the price action depicted in a point-and-figure chart is independent of time.


This is the specific instance of a chosen “strategy”. An option position is an investment comprised of one or more options.

Position Limit

The maximum number of speculative contracts one can hold as determined by theCFTC and/or the exchange where the contract is traded.

Position Trader

A trader who either buys or sells contracts and holds them for an extended period of time, as distinguished from a day trader.

Prearranged Trading

Trading between brokers in accordance with an expressed or implied agreement or understanding. Prearranged trading is a violation of the Commodity Exchange Act.

Price Discovery

The process of determining the price of a commodity by trading conducted in open outcry at an exchange.

Price Limit

The maximum advance or decline, from the previous day’s settlement price, permitted for a contract in one trading session. Also referred to as Maximum Price Fluctuation.


This is the price of an option contract.


A shorter-term countertrend move. Pullbacks offer opportunities to enter existing trends. See also Corrections.

Purchase and Sale Statement (P&S)

A statement sent by a Futures Commission Merchant to a customer when a futures or options position has been liquidated or offset. The statement shows the number of contracts bought or sold, the prices at which the contracts were bought or sold, the gross profit or loss, the commission charges and the net profit or loss on the transaction. Sometimes combined with a Confirmation Statement.


This option contract conveys the right to sell a standard quantity of a specified asset at a fixed price per unit (the striking price) for a limited length of time (until expiration).

Put/Call Ratio

This ratio, used by many as a leading indicator, is computed by dividing the 4-day average of total put volume by the 4-day average of total call volume.


The use of unrealized profits on existing positions as margin to increase the size of the position, normally in successively smaller increments.

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The actual price or the bid or the ask price of either cash commodities or futures or options contracts at a particular time.

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The difference between the high and low price of a commodity during a given trading session, week, month, year, etc.

Rate of Change

A momentum calculation that divides today’s closing price by the closing price N days ago. Except for the scale, this study is virtually identical to the “momentum” technical study, which measures the difference between today’s close and the close N days ago.

Regulations (CFTC)

The regulations adopted and enforced by the CFTC in order to administer the Commodity Exchange Act.


The term is used in conjunction with the CFTC’s customer claims procedure to recover civil damages.

Reportable Positions

The number of open contracts specified by the CFTC when a firm or individual must begin reporting total positions by delivery month to the authorized exchange and/or the CFTC.


A price level that acts as an overhead barrier to further price gains. Prices will frequently rally to these levels and then retreat. Resistance (like support) is rarely a specific price; it is more often a relatively contained price range, frequently in the vicinity of past technical patterns. One of the basic precepts of support and resistance is that once a support level is violated it becomes a likely new resistance level and when a resistance level is penetrated it becomes a new support level.


A short underlying asset position protected by a synthetic long underlying asset position. The synthetic long underlying asset position consists of the combination of a long call option and a short put option. Both options have the same strike price and expire the same month.

Reversal Patterns

Price patterns that suggest a trend reversal rather than a continuation of the current trend. Double and triple tops/bottoms, head-and-shoulders patterns, cup-and-handle patterns, and V tops and bottoms are some examples of reversal patterns.


When one futures contract expires and the next contract in the cycle becomes the new front month.

Round Turn

A completed futures transaction involving both a purchase and a liquidating sale, or a sale followed by a covering purchase.

Rules (NFA)

The standards and requirements to which participants who are required to be Members of National Futures Association must subscribe and conform.


A strongly trending stock or future.

Running Cup-and-Handle Pattern

A cup-and-handle pattern that occurs in an existing up trend. In this context, the pattern functions as a continuation pattern (a pause in the trend) rather than a reversal pattern. See Cup-And-Handle pattern.

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A trader who trades for small, short-term profits during the course of a trading session, rarely carrying a position overnight.

Segregated Account

A special account used to hold and separate customers’ assets from those of the broker or firm.

Self-Regulatory Organization (SRO)

Self-regulatory organizations (i.e. the futures exchanges and National Futures Association) enforce minimum financial and sales practice requirements for their members.

Settlement Price

The last price paid for a contract on any trading day. Settlement prices are used to determine open trade equity, margin calls and invoice prices for deliveries.


An obligation to purchase an asset at some time in the future. An asset is sold short given the expectation of a decline in its price.


A market participant who tries to profit from buying and selling futures and options contracts by anticipating future price movements. Speculators assume market price risk and add liquidity and capital to the futures markets.

Slim Jim

A narrow-range, intraday consolidation pattern that forms at or near the high or low of the day. Generally, the longer and tighter the consolidation, the more explosive the eventual breakout.


A price bar that extends much higher or lower than the surrounding price bars.


Usually refers to a cash market price for a physical commodity that is available for immediate delivery.

Spot Month

See Nearby Delivery Month.

Spread Order

This is a type of order for the simultaneous purchase and sale of two options of the same type (calls or puts) on the same underlying. If placed with a “limit”, the two positions must be traded for a specific price difference or better.

An oscillator based on the position of the current close relative to the absolute price range over the last N days.


Stochastics consists of two lines: %K, which is the basic calculation, and %D, which is a moving average (typically three days) of the %K line. Usually, “stochastics” refers to an additionally smoothed version of the formula, whereby the original %D becomes the new %K line and a moving average of this line becomes the new %D line (this version is sometimes called “slow” stochastics, while the original calculation is called “fast” stochastics).

Stop Order

A trade order placed above or below the market’s current price level that is intended either to liquidate a losing trade (a “stop-loss” order) or to establish a new market position.

Stop orders become market orders as soon as their prices are touched. A stop-limit order specifies the worst price at which a stop can be filled, e.g., “sell 100 shares of DAL at 45 on a stop, 43 limit.”


A straddle is a long or short position in both call and put options. The options share the same exercise price, expiration month and the same underlying asset. A short straddle means that both call and put options are sold short. A long straddle means that both call and put options are bought long.


An option strategy is one of various kinds of option investments, i.e. long call, covered write, bull spread, etc.

Strike Price

This is the fixed price per unit, specified in the option contract.

A price level that acts as a floor to further price declines. When a market repeatedly declines to a particular level and then rallies, the market is said to be “offering support” at that level.


Support (like resistance) is rarely a precise price; it is more often a relatively contained price range, frequently in the vicinity of past technical patterns.

One of the basic precepts of support and resistance is that once a support level is violated it becomes a likely new resistance level and when a resistance level is penetrated it becomes a new support level.


In general, the exchange of one asset or liability for a similar asset or liability for the purpose of lengthening or shortening maturities, or raising or lowering coupon rates, to maximize revenue or minimize financing costs.

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A new high bar that opens and closes near its low, or a new low bar that opens and closes near its high.

Technical Analysis

An approach to analysis of futures markets which examines patterns of price change, rates of change, and changes in volume of trading, open interest and other statistical indicators. See also Charting.


This is the daily drop in dollar value of an option due to the affect of time alone. Theta is dollars lost per day per contract. Negative theta signifies long option positions or debit spreads; positive theta signifies short options or credit spreads.

The “Turk”

A reference to what appears to be a calculated market stabilizing action by the Federal Reserve or its appointed ally, such as large broker-dealers who do program trading and are active in the futures. The Turk has had a tendency to “save the day” during many potential crisis occasions, such as when it looks like the market is about to crash.


A “tick” is the minimum price increment a stock, future, or option can trade in. For example, in a stock that trades in minimum increments of 1/16th of a point, a move of 1/16 up or down would be a one-tick move. In the S&P 500 futures, a tick is .10, in crude oil futures, a tick is .01, and so on.

TICK Indicator

The TICK indicator measures the difference between the number of up-ticking NYSE stocks vs. the number of down-ticking NYSE stocks throughout the day. (Do not confuse with the term “tick,” used to describe a minimum price fluctuation.)

Time Spreads

A long time spread is created by selling a near term option and by buying a longer term option. Both options are on the same underlying asset, are of the same type, and have the same exercise price.

Time Value

This is the amount that the premium of an option exceeds its intrinsic value. If an option is out-of-the-money then its entire premium consists of time value.

Trading Range

Non-trending, sideways price action with fairly defined upper and lower boundaries.

Trailing Stop

A stop order that is raised (in a rising market) or lowered (in a declining market) to follow an open position and lock in profits.


A straight line defining a price trend. Up trendlines connect the lows of several price bars while down trendlines connect the highs of price bars.


A longer-term (approximately a month or more on a daily chart) consolidation/continuation pattern in which prices progressively converge in a series of lower highs and higher lows.


The TRIN indicator compares advancing issues/declining issues to the up volume/down volume ratio.

Triple Bottom

A reversal pattern consisting of three price troughs at roughly the same price level. The implication is that by failing to move through such levels after three attempts, the market is meeting significant support and could reverse. See also “triple top,” “double bottom,” double top.”

Triple Top

A reversal pattern consisting of three price peaks at roughly the same price level. The implication is that by failing to move through such levels after three attempts, the market is meeting significant resistance and could reverse. See also Double Top.

True Range

A volatility calculation developed by Welles Wilder that modifies the standard range calculation by accounting for gaps between price bars. True Range is defined as the largest value (in absolute terms) of:

1. today’s high and today’s low (the standard daily range calculation);

2. today’s high and yesterday’s close;

3. today’s low and yesterday’s close.

Average True Range (ATR) is simply a moving average of true range calculated over N days. True range and average true range are common volatility measurements.

Two-step Pullback

A combination of two pullbacks, where the second pullback tests the level of the first pullback. See Pullback.

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See Naked.


This is the asset specified in an option contract, which, except in the case of cash-settled options, is transferred upon exercise of the option contract. With cash settled options, only cash changes hands, based on the current price of the underlying.

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Variable Limit

A price system that allows for larger than normal allowable price movements under certain conditions. In periods of extreme volatility, some exchanges permit trading at price levels that exceed regular daily price limits.

Variation Margin

Additional margin required to be deposited by a clearing member firm to the clearinghouse during periods of great market volatility or in the case of high-risk accounts.


Vega is the sensitivity of an option’s theoretical price to changes in volatility. It is the dollar amount of gain or loss, per contract, you should theoretically experience if volatility goes up one percentage point.


Volatility is a measure of the amount by which an asset has fluctuated, or is expected to fluctuate, in a given period of time. Assets with greater volatility exhibit wider price swings and their options are higher in price than less volatile assets.


The number of shares or contracts traded in a particular market in a given time period (usually day). See also Liquidity and Open Interest.

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Warehouse Receipt

A document guaranteeing the existence and availability of a given quantity and quality of a commodity in storage; commonly used as the instrument of transfer of ownership in both cash and futures transactions.

Weighted Moving Average

See Moving Average.


When price repeatedly thrashes above and below a moving average (or support or resistance level) triggering multiple false trading signals. The same term applies to indicators that behave similarly, e.g., when an oscillator like the relative strength index (RSI) repeatedly moves above and below its overbought or oversold level.

Wide-range Day Bar

A high-volatility price bar, i.e., one whose range is much greater than the preceding price bars (or alternately, one with a range much greater than the average range over an N-day period).

Wire House

See Futures Commission Merchant.


An investor who sells an option contract not currently held (selling the option short) is said to have written the option.


See Grantor.

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A measure of the annual return on an investment.

Yield Curve

A chart in which yield level is plotted on the vertical axis, and the term to maturity of debt instruments of similar creditworthiness is plotted on the horizontal axis.

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