Commodity – A good for which there is demand,
Goods - A physical (tangible) product, capable of being delivered to a purchaser and involves the transfer of ownership from seller to buyer.
Demand - The amount of a particular economic good or service that a consumer or group of consumers will want to purchase at a given price.
Commodity market or exchange – Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges.
Option futures or futures contract – A standardized contract to buy or sell a specified commodity of standardized quality at a certain date in the future and at a market-determined price.
Calls – A Call is an options contract that gives the buyer the right to exercise the option and buy the underlying commodity at the strike price on (European style options) or at any time up to (US style options) the expiration date.
Puts - A Put is an options contract that gives the buyer the right to sell the underlying commodity at the strike price on (European style options) or at any time up to (US style options) the expiration date.
Options holder – One who originally buys an option contract.
Options writer – One who originally sells an option contract.
Long position – The state of actually owning a security, contract, or commodity. also called long. opposite of short.
Short position – In the case of a futures contract, the promise to sell a certain quantity of a good at a particular price in the future. opposite of a long position.
Strike Price – The fixed price at which the owner of an option can purchase, in the case of a call, or sell, in the case of a put, the underlying security or commodity. Also referred to as exercise price.
In the money – The relation of the strike price of an option and where the underlying futures market is currently trading. A call option is in the money if its strike price is less than the current market price of the underlying commodity contract. A put option is in the money if its strike price is greater than the current market price of the underlying commodity contract.
Intrinsic Value – The intrinsic value represents the amount by which an option is in the money.
To calculate the intrinsic value for call options, you would take the futures price and subtract the strike price of the option to get the intrinsic value.
(futures price – strike price = intrinsic value)
For put options, you would take the strike price and subtract the futures price to get the intrinsic value.
(strike price – futures price = intrinsic value)
An out of the money option has no intrinsic value.
Premium – (1) The additional payment allowed by exchange regulation for delivery of higher-than-required standards or grades of a commodity against a futures contract. (2) In speaking of price relationships between different delivery months of a given commodity, one is said to be “trading at a premium’ over another when its price is greater than that of the other. (3) In financial instruments, the dollar amount by which a security trades above its principal value.
Also: the total cost of an option.
See Option Premium.
Option Premium – The price of an option the sum of money that the option buyer pays and the option seller receives for the rights granted by the option.
Time value – Amount by which the going market value of an option is above the amount realized if the option is exercised now. In other words, time value equals option premium less its intrinsic value.
Contract Price – Mutually agreed upon total amount that a principal pays to a contractor on completion of the contract, in accordance with contract terms and conditions.
Volatility – Size and frequency of rapid changes in the price of a security.
Margin – Difference between the spot price and forward price quoted for a commodity.
Customer Margin – Within the futures industry, financial guarantees required of both buyers and sellers of futures contracts and sellers of options contracts to ensure fulfillment of contract obligations.
Clearing Margin – Financial safeguards to ensure that clearing members (usually companies or corporations) perform on their customers’ open futures and options contracts.
Counterparty Risk – Probability of loss arising from the actions of the other party to a transaction.
Clearing house – An agency or separate corporation of a futures exchange that is responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery, and reporting trading data.
Hedgers – Someone who takes out an investment specifically to reduce or cancel out the risk in another investment.
Spread Traders – Someone who simultaneously buys and sells two related markets in the expectation that a profit will be made when the position is offset.
Offsetting contracts – Taking a second futures or options position opposite to the initial or opening position.
Futures Commission Merchants – An individual or organization accepting orders to buy or sell futures or futures options. A person or organization in this role needs to be certified by the Commodities and Futures Trading Commission. A futures commission merchant has a role in the futures market similar to that of a broker in the securities market.
Performance bond margin – The amount of money deposited by both a buyer and seller of a futures contract or an options seller to ensure performance of the term of the contract. Margin in commodities is not a payment of equity or down payment on the commodity itself, but rather it is a security deposit.
Initial Margin – The amount a futures market participant must deposit into his margin account at the time he places an order to buy or sell a futures contract. Also referred to as Original Margin.
Alpha - A measure of a mutual fund’s risk relative to the overall market. It reflects the difference between a mutual fund’s actual performance and the performance expected based on risk level taken by the fund’s manager.