At-The-Money (Options)
The option with a strike price closest to the underlying futures price.
 
Arbitrage
The simultaneous purchase of cash, futures, or options in one market against the sale of cash, futures, or options in a different market in order to profit from a price disparity.
 
Automatic Exercise
Following options expiration, an option which is in-the-money is automatically exercised, unless the holder of the option submits specific instructions to the contrary.
 
Backwardation
Market situation in which futures prices are lower in succeeding delivery months.  Also known as an inverted market.
 
Basis
The difference between the futures price and your local cash price.  Normally basis is computed as the difference between the current local cash price and the price of the futures contract with the closest delivery month.  The difference between the local cash price and futures price is due to transportation costs, storage costs, supply and demand, local conditions, and other factors.
 
Bear Spread (Futures)
In most commodities the term refers to selling the nearby contract month, and buying the deferred contract, to profit from a change in the price relationship.
 
Bull Spread (Futures)
In most commodities, the term refers to buying the nearby month, and selling the deferred month, to profit from the change in the price relationship.
 
Calendar Spread
The simultaneous purchase and sale of the same futures contract, but different contract months.
 
Call Option
A contract between a buyer and seller in which the buyer pays a premium and acquires the right, but not the obligation, to purchase a specified futures contract at the strike price on or prior to expiration.
 
Carrying Charge
For physical commodities, the cost of storage space, insurance, and finance charges incurred by holding a physical commodity.
 
Carryover
Last year’s ending stocks of a storable commodity.
 
Cash Market
A place where people buy and sell the actual commodities, i.e. grain elevator, bank, etc.  Spot usually refers to a cash market price for a physical commodity that is available for immediate delivery.  A forward contract is a cash contract in which a seller agrees to deliver a specific cash commodity to a buyer sometime in the future.  Forward contracts, in contrast to futures contracts, are privately negotiated and are not standardized.
 
Crop (Marketing) Year
The time span from harvest to harvest for agricultural commodities. Example is the marketing year for soybeans begins September 1 and ends August 31.  The futures contract month of November represents the first major new-crop marketing month for soybeans.
 
Exercise
To invoke the right granted under the terms of an options contract to buy or sell the underlying futures contract.  The options holder (long) is the one who exercises the option. 
 
First Notice Day
The first day on which a notice of intent to deliver a commodity in fulfillment of a futures contract can be made by the clearinghouse to a buyer. 
 
Future
A standardized contract for the purchase and sale of physical commodities on a futures exchange for future delivery.
 
In-the-Money
A call option with a strike price lower (or a put option with a strike price higher) than the current market value of the underlying futures commodity.
 
Inverted Market
A futures market in which the relationship between two delivery months of the same commodity is abnormal.
 
Market order
An order placed at any time during the trading session to immediately execute the entire order at the best available offer price (for buy orders) or bid price (for sell orders).
 
Option
A contract that gives the owner the right, but not the obligation, to buy or sell a futures contract at a specified price within a specified time period.
 
Over-the-counter derivative
Futures and option contracts with terms that do not necessarily adhere to those of a standardized futures contract.
 
Open Interest
The total number of futures contracts long or short in a delivery month or market that has been entered into and not yet offset of fulfilled by delivery.  Each open transaction has a buyer and a seller, but for calculation of open interest, only one side of the contract is counted.
 
Over The Counter (OTC) Market
A market in which custom-tailored contracts such as stocks and foreign currencies are bought and sold between counterparties and are not exchange traded.
 
Overbought
A technical opinion of a market which has risen too high in relation to underlying fundamental factors.
 
Put Option
A contract that provides the purchaser the right but not the obligation to sell a futures contract at an agreed price (the strike price) at any time during the life of the option.  A put option is purchased in the expectation of a decline in price.
 
Risk Management
Identifying, analyzing and either mitigating or absorbing the price risk in investing or business planning.
 
Speculator
An individual who accepts market risk in an attempt to profit from buying and selling futures and/or options contracts by correctly anticipating future price movements.
 
Spreads
Spreads are the difference between futures prices.  Because grain is a storable commodity, and produced only once every year, the futures prices for several delivery months represent the same crop.  An example, corn futures prices for December, March, and July all represent the same crop and tend to move together.  The September delivery month tends to be a transitional month between the old crop and new crop.  These differences between futures prices between delivery months of the same crop is due to the costs of storage and interest between the delivery months.
 
Strike Price
The terms “exercise price”, “strike price”, and “striking price” , mean the price at which the futures contract underlying the options contract will be assigned upon exercise of the option.
 
Stop order
A stop order becomes a market order once the price is met.  An example, a “buy stop” is placed above the market and is executed only when the market trades at or above the stop price.
 
Underlying Futures Contract
The futures contract that may be purchased (in the case of a call) or sold (in the case of a put) upon the exercise of the option.
 
Volume
The number of contracts in futures or options on futures transacted during a specified period of time.


*Information provided by the Chicago Mercantile Association.