GLOSSARY
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ARBITRAGE
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The simultaneous
purchase and sale of
identical or equivalent financial instruments or
commodity futures in order to benefit from a
discrepancy in their price relationship.
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ASSIGNED
TRADE
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A short
option position which is converted to a
futures position at the traded strike price
If a CALL .
. . the subsequent futures position
will a sell (short) at the strike price.
If a PUT . . . the subsequent
futures position
will a buy (long) at the strike price.
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ASK
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Also called
"offer". Indicates a willingness to
sell a futures contract at a given price.
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ASSOCIATED
PERSION
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A person
employed by, and soliciting business
for, an Inroducing Broker or a Futures
Commission Merchant and is registered with
the NFA.
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BACK MONTH
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The futures
or options on futures months being
traded that are furthest from expiration
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BEAR
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One who believes
prices will decrease.
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BEAR MARKET
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A market in
which prices are declining.
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BEAR SPREAD
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Typically
represents selling a nearby contract
while buying a deferred contract.
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BID
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The price
that the market participants are
willing to pay.
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BREAK
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A drop in market
price.
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BULL
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One who expects
prices to rise.
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BULL MARKET
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A market in
which prices are rising.
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BULL SPREAD
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Typically
represents buying a nearby contract
while selling a deferred contract.
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BUY ON CLOSE
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To buy at
the end of a trading session at a
price within the closing range.
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BUY ON OPENING
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To buy at
the beginning of a trading session at
a price within the opening range.
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CABINET TRADE
(CAB)
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A trade
that allows options traders to liquidate
deep out-of-the-money options by trading the
option at a price equal to one-half tick.
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CALL
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An option
to buy a commodity, security or
futures contract at a specified price any time
between now and the expiration date of the
option contract.
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CASH
COMMODITY
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The actual
physical commodity as distinguished
from a futures commodity.
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CLOSE
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The period
at the end of the trading session.
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CLOSING RANGE
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The high
and low prices, or bids and offers,
recorded during the period designated as the
official close.
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COMMISSION
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The one-time
fee charged by a broker to a
customer when a futures or options on futures
position is liquidated either by offset or delivery.
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CFTC
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The Commodity
Futures Trading Commission
as created by the Commodity Futures Trading
Commission Act of 1974. This government
agency currently regulates the US commodity
futures industry.
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CONTRACT
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Unit of
trading for a financial or commodity
future. Also, actual bilateral agreement
between the parties (buyer and seller) of a
futures or options on futures transaction as
defined by an exchange.
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CONTRACT
MONTH
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Unit of
trading for a financial or commodity
future. Also, actual bilateral agreement
between the parties (buyer and seller) of a
futures or options on futures transaction as
defined by an exchange.
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DAY ORDER
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An order
that is placed for execution during
only one trading session. If the order cannot be
executed that day, it is automatically cancelled.
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DAY TRADING
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Refers to
establishing and liquidating the same
position or positions within one day's trading,
thus ending the day with open position in the
market.
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DEFERRED
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Another term
for "back months."
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DELIVERY
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The tender
and receipt of an actual commodity
or financial instrument, or cash in settlement of
a futures contract.
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DELIVERY
MONTH
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The month which
a contrract expires.
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EXCHANGE
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An entity
which provides for an auction of
trades, such as the Chicago Board of Trade.
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EXERCISE
(STRIKE) PRICE
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The price
at which the holder (buyer) may
purchase or sell the underlying futures contract
upon the exercise of an option.
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EXERCISED
TRADE
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A long option position which
is converted to a
futures position at the traded strike price
If a CALL . . . the subsequent
futures position
will a buy (long) at the strike price.
If a PUT . . . the subsequent
futures position
will a sell (short) at the strike price.
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EXPIRATION
DATE
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The last
day that an option may be exercised
into the underlying futures contract. Also, the
last day of trading for a futures contract.
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EXPIRED OPTION
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An option
position that has surpassed the
expiration date. Typically with the premium at
cabinet (no value).
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FIRST NOTICE
DAY
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First day
for which position holders can submit
intent to make or take delivery of the underlying
cash product.
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FLOOR BROKER
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An exchange
member who is paid a fee for
executing orders for Clearing Members or their
customers. A Floor Broker executing orders
must be licensed by the CFTC.
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FLOOR TRADER
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An exchange
member who generally trades
only for his/her own account or for an account
controlled by him/her. Also referred to as a
"local."
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FUTURES
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A Futures
Contract is an agreement between a
buyer and a seller to receive and deliver on a
future date a specified amount of a product at
an agreed price.
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FUTURES
COMMISSION
MERCHANT
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A firm or
person engaged in soliciting or
accepting and handling orders for the purchase
or sale of futures contracts, subject to the rules
of a futures exchange and, who, in connection
with solicitation or acceptance of orders,
accepts any money or securities to margin any
resulting trades or contracts. The FCM must be
licensed by the CFTC.
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HALF-TURN
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A single transaction
(either initiating a long or
short position).
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HEDGE
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Hedgers
are individuals and firms that make
purchases and sales in the futures market
solely for the purpose of establishing a known
price level--weeks or months in advance--for
something they later intend to buy or sell in the
cash market.
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HIGH
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The highest
price traded during a defined
period, such as a trading session.
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HOLDER
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One who purchases
an option.
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INITIAL MARGIN
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The funds
required when a futures position (or
a short options on futures position) is opened.
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INTRODUCING
BROKER
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Aka IB.
A registered entity with the NFA. Has a
clearing arrangement with an FCM. If non-
guaranteed, the IB might introduce clients
through multiple FCM's.
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LIMIT ORDER
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An order
given to a broker by a customer that
specifies a price; the order can be executed
only if the market reaches or betters that price.
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LIMIT PRICE
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The maximum
amount the contract price can
change, up or down, during one trading
session, as stipulated by Exchange rules.
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LIQUIDATION
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Any transaction
that offsets or closes out a long
or short futures position.
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LONG
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One who
has bought a futures or options on
futures contract to establish a market position
through an offsetting sale; the opposite of
Short.
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LONG HEDGE
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The purchase
of a futures contract in
anticipation of an actual purchase in the cash
market. Used by processors or exporters as
protection against and advance in the cash
price.
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LOW
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The lowest
price traded in a contract during a
defined period, such as a trading session.
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MAINTENANCE
MARGIN
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A sum, usually
smaller than--but part of--the
initial margin, which must be maintained on
deposit in the customer's account at all times. If
a customer's equity in any futures position
drops to, or under, the maintenance margin
level, a "margin call" is issued for the amount of
money required to restore the customer's
equity in the account to the initial margin level.
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MARGIN
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Funds that
must be deposited as a margin by a
customer with his or her broker, by a broker
with a clearing member, or by a clearing
member, with the Clearing House. The margin
helps to ensure the financial integrity of
brokers, clearing members and the Exchange
as a whole.
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MARGIN CALL
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A demand
for additional funds because of
adverse price movement.
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MARK-TO-
MARKET
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The daily
adjustment of margin accounts to
reflect profits and losses.
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MARKET ORDER
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An order
for immediate execution given to a
broker to buy or sell at the best obtainable
price.
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MINIMUM PRICE
FLUCTUATION
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Smallest
increment of price movement possible
in trading a given contract, often referred to as
a tick.
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MIT
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Market-If-Touched.
A price order that
automatically becomes a market order if the
price is reached.
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NEARBY
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The nearest
active trading month of a futures or
options on futures contract. Also referred to as
"lead month."
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NFA
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National
Futures Association. Regulates and
audits brokers in the futures industry.
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OFFER
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Also called
"ask". Indicates a willingness to sell
a futures contract at a given price.
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OFFSET
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Selling
if one has bought, or buying if one has
sold, a futures or options on futures contract.
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OPEN INTEREST
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Total number
of futures or options on futures
contracts that have not yet been offset or
fulfilled by delivery. An indicator of the depth or
liquidity of a market (the ability to buy or sell at
or near a given price) and of the use of a
market for risk- and/or asset-management.
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OPEN ORDER
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An order
to a broker that is good until it is
canceled or executed.
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OPENING
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The period
at the beginning of the trading
session during which all transactions are
considered made or first transactions were
completed.
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OPENING PRICE
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The range
of prices at which the first bids and
offers were made or first transactions were
completed.
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OPTION
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A contract
giving the holder the right, but not
the obligation, hence, "option," to buy or sell a
futures contract in a given commodity at a
specified price at any time between now and
the expiration of the option contract.
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OUT TRADES
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A situation
that results when there is some
confusion or error on a trade. A difference in
pricing, with both traders thinking they were
buying, for example, is a reason why an out-
trade may occur.
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POSITION
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An interest
in the market, either long or short, in
the form of open contracts.
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PREMIUM
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1.) The
excess of one futures contract price
over that of another, or over the cash market
price.
2.) The
amount agreed upon between the
purchaser and seller for the purchase or sale of
a futures option --purchasers pay the premium
and sellers (writers) receive the premium.
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PUT
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An option
to sell a commodity, security, or
futures contract at a specified price at any time
between now and the expiration of the option
contract.
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P+S
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Purchase and
Sell of a contract. See OFFSET.
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RALLY
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An upward
movement of prices following a
decline; the opposite of a reaction.
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RANGE
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The high
and low prices or high and low bids
and offers, recorded during a specified time.
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REACTION
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A decline
in prices following an advance. The
opposite of rally.
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REGISTERED
REPRESENTATIVE
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A person
employed by, and soliciting business
for, an Inroducing Broker or a Futures
Commission Merchant and is registered with
the NFA.
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ROUND-TURN
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Procedure
by which a long or short position is
offset by an opposite transaction or by
accepting or making delivery of the actual
financial instrument or physical commodity. (
see P+S )
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SCALP
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To trade
for small gains. Scalping normally
involves establishing and liquidating a position
quickly, usually within the same day, hour or
even just a few minutes.
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SELLER (OPTION)
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See WRITER
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SETTLEMENT
PRICE
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A figure
determined by the closing range that is
used to calculate gains and losses in futures
market accounts. Settlement prices are used to
determine gains, losses, margin calls, and
invoice prices for deliveries.
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SHORT
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One who
has sold a futures contract to
establish a market position and who has not yet
closed out this position through an offsetting
purchase; the opposite of long.
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SHORT HEDGE
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The sale
of a futures contract in anticipation of
a later cash market sale. Used to eliminate or
lessen the possible decline in value of
ownership of an approximately equal amount of
the cash financial instrument or physical
commodity.
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SPECULATOR
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One who
attempts to anticipate price changes
and, through buying and selling futures
contracts, aims to make profits; does not use
the futures market in connection with the
production, processing, marketing or handling
of a product. The speculator has no interest in
making or taking delivery.
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SPREAD
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The simultaneous
purchase and sale of futures
contracts for the same commodity or
instrument for delivery in different months, or in
different but related markets. A spreader is not
concerned with the direction in which the
market moves, but only with the difference
between the prices of each contract.
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STOP ORDER
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An order
to buy or sell at the market when and
if a specified price is reached.
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TICK
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Refers to a
change in price, either up or down.
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TREND
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The general
direction of the market.
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VOLUME
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The number
of transactions in a futures or
options on futures contract made during a
specified period of time.
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WRITER
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An individual
who sells an option.
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