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In 1975 Aerosmith famously said “Walk this way, talk this way.” While the retail futures industry was then in its infancy, it has since grown to have its own walk and talk. The language of a futures broker can be confusing to many who aren’t familiar with it. Like many industries however, the terminology isn’t hard to understand; it just takes some getting used to. After all, we aren’t rocket scientists – well most of us aren’t.

In an effort to bring you up to speed, we’re giving you a cheat sheet of some terms that may not be obvious – a pocket dictionary of futures lingo, as it were. Most people don’t talk broker-speak.

We’ll do this in two installments. The first will focus on general industry language. The second will describe terms specific to managed futures and the performance summary pages we often show and send.

As always, call your BROKER for more about how to talk this way.

Common Industry Terms (in alphabetical order):

Arbitrage – Attempting to take advantage of small price discrepancies of the same commodity by simultaneously buying and selling on different exchanges. For example, buying WTI Crude Oil on NYMEX and Selling WTI Crude Oil on ICE.

Ask Price – The lowest price someone is willing to sell. Also known as the “offer.”

Back Months – The contract months of a futures market after the front month.

Bid Price – The highest price someone is willing to buy.

Carry – The cost (or return) of holding an investment. In a normal market, futures contract months are typically higher the farther out in time by the carry cost. The cost of carry may be comprised of storage fees, interest rates, insurance, etc.

CFTC – The Commodity Futures Trading Commission. This is the government body responsible for overseeing derivative markets including futures, options on futures, forex, swaps and other OTC products.

CME Group – The umbrella corporation over the largest group of futures exchanges in the world. It is comprised of the Chicago Board of Trade, Chicago Mercantile Exchange, New York Mercantile Exchange, Commodity Exchange, Kansas City Board of Trade, Dubai Mercantile Exchange and more.

Contrarian – A type of trading style that seeks to profit from periodic retracements amidst a larger trend.

Front Month – Properly, the first futures month after the current spot month. Colloquially, it is the nearest month with the most trading volume. For example, if it is currently June, the next futures month for Gold is July. Since the vast majority of trading volume takes place in August, however, August would be referred to as the front month.

Futures Contract – An agreement to make a transaction at a future time for a specified price, quantity and quality. The buyer agrees to pay and receive at the future time; the seller agrees to deliver at the future time. For example, an August 2015 Gold futures contract represents 100oz of Gold to be delivered on August 27, 2015 at a grade of no less than .995 fineness.

Hedging – Hedging is all about protection. You can be referred to as a “hedger” as a commercial producer or user of a commodity when you use the futures markets for price protection. For example, a farmer with corn in the storage bin or even in the ground is “long” his actual corn. He may choose to hedge by selling a corn futures contract. Additionally, speculators can “hedge” by using a trade to help mitigate the risk of a position. For example, if a trader is long e-mini NASDAQ futures, she may buy a put option as a hedge.

ICE – The Intercontinental Exchange. Formerly known as the New York Board of Trade, this exchange was known for facilitating soft markets (e.g. cocoa, sugar) but has since grown to be the second largest group of futures exchanges in the world.

Long vs. Short – Long refers to a buy position or bullish disposition. Short refers to a sell position or bearish disposition. Short-selling in the futures world is not the same as with securities in that there is no borrowing involved.

Limit Order – An order to buy or sell a contract at a specific price or better. For example, “Sell 10 June E-mini S&P contracts at 2100.00 or better.”

Market Order – An order to buy or sell a contract at the current market price. A market order to buy will be filled at the Offer or Ask price. A market order to sell will be filled at the Bid price.

Margin – The amount required to have on deposit in your account, which is held as a good faith deposit for your trade(s). The exchange determines current the margin rate, however, your clearing firm (FCM) reserves the right to increase it.

Margin Call – When the required margin (good faith deposit) for a trading account exceeds the funds available. This may happen through a rising margin requirement or falling equity. Margin calls can be met by promptly adding sufficient funds or by reducing/adjusting positions to reduce the margin requirement.

NFA – National Futures Association. A Self Regulatory Organization established by the CFTC to oversee much of what goes on in the alternative investment space.

Normal vs. Inverted Market – Since the cost of carry (see above) is generally, positive, the futures front month and each subsequent month are normally progressively higher reflecting this cost of carry. A normal market shows futures months farther out in time trading at a premium to nearer months. An inverted market shows the opposite – farther out months trading at a discount to near months.

Offset – To exit a position. To offset a buy (long) position, you must sell the same market. To offset a sell position, you must buy the same market. E.G., to offset a long position of 5 September Copper contracts, you must sell 5 September Copper contracts.

Option Contract – a contract that represents the right but not the obligation to buy or sell an underlying market at a given price called the “strike” or “exercise” price. You can have options on stock, futures, forex and other assets. A Call option represents the right but not the obligation to buy the underlying asset at the given strike price. A Put option represents the right but not the obligation to sell the underlying asset at the given strike price. You can buy and sell both Puts and Calls. The price you pay or receive for an option is called “premium.”

The Pit – An octagonal area on the exchange’s trading floor designated to trading one or a group of markets (e.g. the bond pit). In this area, brokers would communicate their needs to buy/sell via open out-cry and hand signals. In recent years, the vast majority of trading now occurs electronically instead of orders being filled by an actual pit broker in a market’s given pit.

Speculating – Trading with intent to profit from the rise (long) or fall (short) in a market’s price. This type of trading is in contrast to hedging.

Spot (Cash) Market – The actual market upon which the price of futures contracts are based. For example, you can buy and sell Live Cattle today at your local market (spot market).

Spread – There are many different contexts for this word:

  • Inter-commodity – simultaneously buying and selling different commodities that are correlated. E.G., Buy 1 December Wheat / Sell 1 December Corn
  • Bid/Ask – the difference between the bid price and the ask (offer) price in a market. Typically, very active markets have a small bid/ask spread whereas less active markets have a wider bid/ask spread.
  • Calendar – simultaneously buying and selling the same market in different contract months. E.G., Buy 25 July Lean Hogs / Sell 25 December Lean Hogs
  • Options – There many different types of options spreads, but they all involve a bullish and bearish part. Examples include, credit spreads, butterfly spreads, ratio spreads, etc.
  • Cash Basis – Used especially by hedgers, this is the difference in price between the cash market and the chosen futures contract month. This affected by the cost of carry among other factors.

Stop Order – A type of market order that is conditional upon the market trading at a certain price, the “stop” price. For example, “buy 10 August Gold contracts at 1200 STOP.” This order will rest until August Gold trades at 1200/oz. Then your order becomes a market order intended to be filled at the best available price.

The Foremost Trading Team

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Disclaimer: Trading futures, options on futures, retail off-exchange foreign currency transactions (“Forex”), investing in managed futures and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. This website contains information obtained from sources believed to be reliable, but such information has not been independently verified and its accuracy is not guaranteed by Foremost Trading. Past performance is not necessarily indicative of future results. Any mention of performance in any context whether actual or hypothetical is no guarantee of future results. Foremost Trading became a registered ‘dba’ of RCM Alternatives in July of 2020. Please see full disclaimer here: https://www.rcmalternatives.com/disclaimer/