Uncovered Options Trading System
Back Month is futures delivery months other than the spot or front month (also called deferred months).
Back Office is the department in a financial institution that processes and deals and handles delivery, settlement, and regulatory procedures.
Back Pricing is the fixing the price of a commodity for which the commitment to purchase has been made in advance. The buyer can fix the price relative to any monthly or periodic delivery using the futures markets.
Back Spread is a delta-neutral ratio spread in which more options are bought than sold. A back spread will be profitable if volatility increases. See Delta.
Backwardation is market situation in which futures prices are progressively lower in the distant delivery months. For instance, if the gold quotation for June is $400.00 per ounce and that for December is $390.00 per ounce, the backwardation for five months against June is $10.00 per ounce. (Backwardation is the opposite of contango).
Banker's Acceptance is a draft or bill of exchange accepted by a bank where the accepting institution guarantees payment. Used extensively in foreign trade transactions.
Basis is the difference between the current cash price of a commodity and the futures price of the same commodity. In more details, the Basis is the difference between the spot or cash price of a commodity and the price of the nearest futures contract for the same or a related commodity. Basis is usually computed in relation to the futures contract next to expire and may reflect different time periods, product forms, grades, or locations.
Basis Grade is the grade of a commodity used as the standard or par grade of a futures contract.
Basis Point is the measurement of a change in the yield of a debt security. One basis point equals 1/100 of one percent.
Basis Quote is an offer or sale of a cash commodity in terms of the difference above or below a futures price (e.g., 10 cents over December corn).
Basis Risk is the risk associated with an unexpected widening or narrowing of basis between the time a hedge position is established and the time that it is lifted.
basis Swap is a swap whose cash settlement price is calculated based on the basis between a futures contract and the spot price of the underlying commodity or a closely related commodity on a specified date.
Bear is one who expects a decline in prices. The Bear trader is is the opposite of a Bull trader. A Bear (bearish trader) expect to profit on declining price. A news item is considered bearish if it is expected to result in lower prices.
Bear Market is a market in which prices generally are declining over a longer period of time. bear market is opposite of bull market. A market participant who believes prices will move lower is called a "bear."A news item is considered bearish if it is expected to result in lower prices. Bear market is usually called as Bearish market.
A temporary rise in prices during a bear market.
1. A trading strategy involving the simultaneous purchase and sale of options of the same class and expiration date, but different strike prices. In a bear spread, the option that is purchased has a lower delta than the option that is bought. For example, in a call bear spread, the purchased option has a higher exercise price than the option that is sold. Also called bear vertical spread.
2. The simultaneous purchase and sale of two futures contracts in the same or related commodities with the intention of profiting from a decline in prices but at the same time limiting the potential loss if this expectation does not materialize. In agricultural products, this is accomplished by selling a nearby delivery and buying a deferred delivery.
Beta (beta Coefficient) is a measure of the variability of rate of return or value of a stock or portfolio compared to that of the overall market, typically used as a measure of riskiness.
Bid is an expression of willingness to buy a commodity at a given price. This is an offer to buy a specific quantity of a commodity at a stated price. Bid is opposite to Ask. Bid price is the price level at which a trader is ready to buy an offered commodity.
Bid-Ask Spread is the difference between the bid price and the ask or offer price. This is the difference between the price level at which a buyer a ready to by an offered security and the price which a commodity seller is willing to receive.
Black-Scholes Model is an option pricing model initially developed by Fischer Black and Myron Scholes for securities options and later refined by Black for options on futures.
Blackboard Trading is the practice, no longer used, of buying and selling commodities by posting prices on a blackboard on a wall of a commodity exchange.
Block Trade is a large transaction that is negotiated off a trading floor or facility and then executed on an exchange’s trading facility, as permitted under exchange rules. For more information, see CFTC Advisory: Alternative Execution, or Block Trading, Procedures for the Futures Industry.
Any organized exchange or other trading facility for the trading of futures and/or option contracts.
Boiler Room is an enterprise that often is operated out of inexpensive, low-rent quarters (hence the term "boiler room"), that uses high pressure sales tactics (generally over the telephone), and possibly false or misleading information to solicit generally unsophisticated investors.
Book Transfer is a series of accounting or bookkeeping entries used to settle a series of cash market transactions.
Booking the Basis is a forward pricing sales arrangement in which the cash price is determined either by the buyer or seller within a specified time. At that time, the previously-agreed basis is applied to the then-current futures quotation.
Box Spread is an option position in which the owner establishes a long call and a short put at one strike price and a short call and a long put at another strike price, all of which are in the same contract month in the same commodity.
Break (Price Break) is a rapid and sharp price decline.
Broad-Based Security Index is any index of securities that does not meet the legal definition of narrow-based security index.
Broker is a company or individual that executes futures and options orders on behalf of financial and commercial institutions and/or the general public. A broker charges a fee or commission for executing buy or sell orders for a customer. In commodity futures trading, the term may refer to:
a) a Floor broker, a person who actually executes orders on the trading floor of an exchange;
b) an Account executive or associated person, the person who deals with customers in the offices of futures commission merchants;
c) the futures commission merchant.
Broker Association is two or more persons with exchange trading privileges who
1) share responsibility for executing customer orders;
2) have access to each other's unfilled customer orders as a result of common employment or other types of relationships;
3) share profits or losses associated with their brokerage or trading activity.
Bucket Shop is a brokerage enterprise that “books" (i.e., takes the opposite side of) retail customer orders without actually having them executed on an exchange.
Bucketing is directly or indirectly taking the opposite side of a customer's order into a broker's own account or into an account in which a broker has an interest, without open and competitive execution of the order on an exchange. Also called trading against.
Bull is a trader who expects a rise in prices. Bull trader is the opposite of bear. Bullish trader expects to profit on rising price. A news item is considered bullish if it is expected to result in higher prices.
Bull Market (also called Bullish Market) is a market in which prices generally are rising over a longer period of time. Bull market is opposite of bear market. A market participant who believes prices will move higher is called a "bull." A news item is considered bullish if it is expected to result in higher prices.
There are two main Bull Spread trading strategies:
1) A trading strategy that involves the simultaneous purchase and sale of options of the same class and expiration date but different strike prices. In a bull vertical spread, the purchased option has a higher delta than the option that is sold. For example, in a call bull spread, the purchased option has a lower exercise price than the sold option. Also called bull vertical spread.
2) A trading strategy that involves the simultaneous purchase and sale of two futures contracts in the same or related commodities with the intention of profiting from a rise in prices but at the same time limiting the potential loss if this expectation is wrong. In agricultural commodities, this is accomplished by buying the nearby delivery and selling the deferred.
Bullion is bars or ingots of precious metals, usually cast in standardized sizes.
Bunched order is a discretionary order entered on behalf of multiple customers.
Buoyant is a market in which prices have a tendency to rise easily with a considerable show of strength.
Butterfly Spread is a three-legged option spread in which each leg has the same expiration date but different strike prices. For example, a butterfly spread in soybean call options might consist of one long call at a $5.50 strike price, two short calls at a $5.50 trike price, and one long call at a $6.00 strike price.
Buyer is a market participant (trader/investor) who takes a long futures position or buys an option. An option buyer is also called a taker, holder, or owner.
Buyer's call is a purchase of a specified quantity of a specific grade of a commodity at a fixed number of points above or below a specified delivery month futures price with the buyer allowed a period of time to fix the price either by purchasing a futures contract for the account of the seller or telling the seller when he wishes to fix the price. See Seller’s Call.
Buyer's market is a condition of the market in which there is an abundance of goods available and hence buyers can afford to be selective and may be able to buy at less than the price that previously prevailed.
Buying Hedge (also called Long Hedge) is a hedging transaction in which futures contracts are bought to protect against possible increases in the cost of commodities. See Hedging.
Calendar Spread is a trading strategy that involves:
1) The purchase of one delivery month of a given futures contract and simultaneous sale of a different delivery month of the same futures contract;
2) the purchase of a put or call option and the simultaneous sale of the same type of option with typically the same strike price but a different expiration date. Callendar Spread is also called a horizontal spread or time spread.
Naked options trading is very risky - many people lose money trading them. It is recommended contacting your broker or investment professional to find out about trading risk and margin requirements before getting involved into trading uncovered options.