Glossary

Covered Option

See Also:

Cover: Cover is the purchasing futures to offset a short position (same as Short Covering or Covering Short Position). In some situation Cover is referred to as having in hand the physical commodity when a short futures sale is made, or to acquire the commodity that might be deliverable on a short sale.

Option: Option is a contract that gives the buyer the right, but not the obligation, to buy or sell a specified quantity of a commodity or other instrument at a specific price within a specified period of time, regardless of the market price of that instrument. There are two types of options: Put Options and Call Options.

Call: There are three meaning of the "Call" term. It could be:
1) An option contract giving the buyer the right but not the obligation to purchase a commodity or other asset or to enter into a long futures position;
2) a period at the opening and the close of some futures markets in which the price for each futures contract is established by auction;
3) the requirement that a financial instrument be returned to the issuer prior to maturity, with principal and accrued interest paid off upon return.

Commodity: A commodity, as defined in the Commodity Exchange Act, includes the agricultural commodities enumerated in Section 1a(4) of the Commodity Exchange Act, 7 USC 1a(4), and all other goods and articles, except onions as provided in Public Law 85-839 (7 USC 13-1), a 1958 law that banned futures trading in onions, and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in.

Contract: Contract is a term of reference describing a unit of trading for a commodity future or option. At the same time contract is an agreement to buy or sell a specified commodity, detailing the amount and grade of the product and the date on which the contract will mature and become deliverable.

Futures: Futures (also called Futures Contract) is a legally binding agreement to buy or sell a commodity or financial instrument at a later date. Futures contracts are normally standardized according to the quality, quantity, delivery time and location for each commodity, with price as the only variable.

Futures Contract: Futures Contract is an agreement to purchase or sell a commodity for delivery in the future: (1) at a price that is determined at initiation of the contract; (2) that obligates each party to the contract to fulfill the contract at the specified price; (3) that is used to assume or shift price risk; and (4) that may be satisfied by delivery or offset.

Long: Long Futures trader is a trader who has bought futures contracts or options on futures contracts or owns a cash commodity. Long position (long trading) is opposite to Short position (Short trading).

Put: Put is an option contract that gives the holder the right but not the obligation to sell a specified quantity of a particular commodity or other interest at a given price (the "strike price") prior to or on a future date. Call options is another type of options.

Put Option: Put Option is an option which gives the buyer the right, but not the obligation, to sell the underlying futures contract at a particular price (strike or exercise price) on or before a particular date. Call options on futures gives right to buy underlying futures contracts at specific price on or before expiration date.

Short: Short (shorting) is the selling side of an open futures contract.

Underlying Futures Contract: Underlying Futures Contract is a specific futures contract that the option conveys the right to buy (in case of a call) or sell (in the case of a put).

Labels: