Uncovered Options Trading System
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.
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.
Call Around Market is a market, commonly used for options on futures on European exchanges, in which brokers contact each other outside of the exchange trading facility to arrange block trades.
Call Cotton is a situation when Cotton is bought or sold on call.
Call options is an option which gives the buyer the right, but not the obligation, to purchase ("go long") the underlying futures contract at the strike price on or before the expiration date for American style options. European style call options could be exercised at their expiration only.
Call rule is an exchange regulation under which an official bid price for a cash commodity is competitively established at the close of each day's trading. It holds until the next opening of the exchange.
Called is another term for exercised when an option is a call. In the case of an option on a physical, the writer of a call must deliver the indicated underlying commodity when the option is exercised or called. In the case of an option on a futures contract, a futures position will be created that will require margin, unless the writer of the call has an offsetting position.
Capping is an effecting transactions in an instrument underlying an option shortly before the option's expiration date to depress or prevent a rise in the price of the instrument so that previously written call options will expire worthless, thus protecting premiums previously received. See Pegging.
Carrying Broker is a member of a futures exchange, usually a clearinghouse member, through which another firm, broker or customer chooses to clear all or some trades. Carrying Broker is An exchange member firm, usually a futures commission merchant.
Carrying Charge is the cost of storing a physical commodity or holding a financial instrument over a period of time. These charges include insurance, storage, and interest on the deposited funds, as well as other incidental costs. It is a carrying charge market when there are higher futures prices for each successive contract maturity. If the carrying charge is adequate to reimburse the holder, it is called a "full charge." See Negative Carry, Positive Carry, and Contango.
Cash Commodity (also referred to as Actuals.) is the actual physical commodity as distinguished from the futures contract based on the physical commodity. Cash Commodity sometimes called spot commodity
Cash Forward Sale is the same as Forward Contract. A cash transaction common in many industries, including commodity merchandising, in which a commercial buyer and seller agree upon delivery of a specified quality and quantity of goods at a specified future date. Terms may be more "personalized" than is the case with standardized futures contracts (i.e., delivery time and amount are as determined between seller and buyer). A price may be agreed upon in advance, or there may be agreement that the price will be determined at the time of delivery.
Cash Market is a place where people buy and sell the actual commodities (i.e., grain elevator, bank, etc.). The market for the cash commodity (as contrasted to a futures contract) taking the form of:
1) an organized, self-regulated central market (e.g., a commodity exchange);
2) a decentralized over-the-counter market;
3) a local organization, such as a grain elevator or meat processor, which provides a market for a small region.
cash Price is the price in the marketplace for actual cash or spot commodities to be delivered via customary market channels.
Cash Settlement is a method of settling certain futures or options contracts whereby the market participants settle in cash (payment of money rather than delivery of the commodity) value of the commodity traded according to a procedure specified in the contract.. Cash Settlement is also called Financial Settlement, especially in energy derivatives.
CCC is abbreviation for the Commodity Credit Corporation that is a government-owned corporation established in 1933 to assist American agriculture. Major operations include price support programs, foreign sales, and export credit programs for agricultural commodities.
SCD stands for the Certificate of Deposit which is a time deposit with a specific maturity evidenced by a certificate. Large denomination CDs are typically negotiable.
CEA is an abbreviation for the Commodity Exchange Act or Commodity Exchange Authority.
Certificate of Deposit (CD) is a time deposit with a specific maturity evidenced by a certificate. Large denomination Certificate of Deposits are typically negotiable.
Certificated or Certified Stocks are stocks of a commodity that have been inspected and found to be of a quality deliverable against futures contracts, stored at the delivery points designated as regular or acceptable for delivery by an exchange. In grain, called "stocks in deliverable position." Certified Stocks are alse called Deliverable Stocks.
CFTC abbreviation stands for the Commodity Futures Trading Commission which is the federal regulatory agency established in 1974 that administers the Commodity Exchange Act. The CFTC monitors the futures and options on futures markets in the United States.
Changer is formerly, a clearing member of both the Mid-America Commodity Exchange (MidAm) and another futures exchange who, for a fee, would assume the opposite side of a transaction on MidAm by taking a spread position between MidAm and the other futures exchange that traded an identical, but larger, contract. Through this service, the changer provided liquidity for MidAm and an economical mechanism for arbitrage between the two markets. MidAm was a subsidiary of the Chicago Board of Trade (CBOT). MidAm was closed by the CBOT in 2003 after all MidAm contracts were delisted on MidAm and relisted on the CBOT as Mini contracts. The CBOT still uses changers for former MidAm contracts that are traded on an open outcry platform.
Charting is the use of graphs and charts in the technical analysis of futures markets to plot price movements, volume, open interest or other statistical indicators of price movement as well as volume based technical indicators with the purpose of the analysis history and predicting a possible future trend development.
Chartist is a technical trader or technical analysts who analyses charts and reacts to signals derived the analysis of technical studies and indicators plotted on the charts.
Cheapest-to-Deliver is usually refers to the selection of a class of bonds or notes deliverable against an expiring bond or note futures contract. The bond or note that has the highest implied repo rate is considered cheapest to deliver.
Chooser Option is an exotic option that is transacted in the present, but that at some specified future date is chosen to be either a put or a call option.
Churning is excessive trading that results in the broker who takes control over the customer's account with the purpose of deriving a profit from commissions while disregarding the best interests of the customers.
CIF is the cost, insurance, and freight paid to a point of destination and included in the price quoted.
Circuit Breaker is a system of trading halts and price limits on equities and derivatives markets designed to provide a cooling-off period during large, intraday market declines or rises. The first known use of the term circuit breaker in this context was in the Report of the Presidential Task Force on Market Mechanisms (January 1988), which recommended that circuit breakers be adopted following the market break of October 1987.
Class of options are the options of the same type (i.e., either puts or calls, but not both) covering the same underlying futures contract or other asset (e.g., a March call with a strike price of 62 and a May call with a strike price of 58).
Clear is the process by which a clearinghouse maintains records of all trades and settles margin flow on a daily mark-to-market basis for its clearing members. Through this procedure the clearing organization becomes the buyer to each seller of a futures contract or other derivative, and the seller to each buyer for clearing members.
Clearing Association (also called Clearing Organization and Clearing House) is an entity through which futures and other derivative transactions are cleared and settled.
Clearing House (also called Clearing Organization and Clearing Association) is an entity through which futures and other derivative transactions are cleared and settled.
Clearing member is a member of an exchange clearinghouse responsible for the financial commitments of its customers (a member of clearing organisation). All trades of a non-clearing member must be registered, processed and eventually settled through a clearing member.
An entity through which futures and other derivative transactions are cleared and settled. It is also charged with assuring the proper conduct of each contract's delivery procedures and the adequate financing of trading. A clearing organization may be a division of a particular exchange, an adjunct or affiliate thereof, or a freestanding entity. Also called a clearing house, clearing association or multilateral clearing organization.
Clearing price is the same as Settlement Price and Closing Price and is the last price paid for a futures contract on any trading day. Clearing prices are used to determine open trade equity, margin calls and invoice prices for deliveries.
Clearinghouse is a corporation or separate division of a futures exchange that is responsible for settling trading accounts, collecting and maintaining margin monies, regulating delivery and reporting trade data. The clearinghouse becomes the buyer to each seller (and the seller to each buyer) and assumes responsibility for protecting buyers and sellers from financial loss by assuring performance on each contract.
Close is the exchange-designated period at the end of the trading session during which all transactions are considered made "at the close."
Closing Price is the same as Settlement Price. Closing price is the last price paid for a future contracts on any trading day. The closing price (or closing price range) recorded during trading that takes place in the final period of a trading session's activity that is officially designated as the "close."
Closing-Out (also referred to as Offset) is a liquidation of an existing long or short futures or option position with an equal and opposite transaction.
Combination is a combination of puts and calls that are held either long or short with different strike prices and/or expirations. Types of combinations include straddles and strangles.
Commercial is an entity that is involved in the production, processing, or merchandising of a commodity.
Commercial Grain Stocks is the domestic grain that is in store in public and private elevators at important markets and grain afloat in vessels or barges in lake and seaboard ports.
Commercial Paper is a short-term promissory notesissued in bearer form by large corporations, with maturities ranging from 5 to 270 days. Since the notes are unsecured, the commercial paper market generally is dominated by large corporations with impeccable credit ratings.
Commission is a fee charged by a broker or brokerage house (company) to a customer (trader) for executing a transaction. In the future market commission is
1) The charge made by a futures commission merchant for buying and selling futures contracts;
2) the fee charged by a futures broker for the execution of an order. Note: when capitalized, the word Commission usually refers to the CFTC.
Commission House (also referred to as the Futures Commission Merchant) is individual, association, partnership, corporation, and trust that solicits or accepts orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any exchange and that accept payment from or extend credit to those whose orders are accepted.
Commitments, also known as Open Interest, is the total number of futures or options contracts of a given commodity that have not yet been offset by an opposite futures or option transaction nor fulfilled by delivery of the commodity or option exercise.
Commitments of Traders Report (COT) is a weekly report from the CFTC providing a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. Open interest is broken down by aggregate commercial, non-commercial, and non-reportable holdings.
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.
Commodity Credit is a government-owned corporation established in 1933 to assist American agriculture. Major operations include price support programs, foreign sales, and export credit programs for agricultural commodities.
The Commodity Exchange Act (CEA) provides for the federal regulation of commodity futures and options trading. See Commodity Futures Modernization Act.
Commodity Exchange Authority is a regulatory agency of the U.S. Department of Agriculture established to administer the Commodity Exchange Act prior to 1975. The Commodity Exchange Authority was the predecessor of the Commodity Futures Trading Commission.
Commodity Exchange Commission is a commission that consists of the Secretary of Agriculture, Secretary of Commerce, and the Attorney General, responsible for administering the Commodity Exchange Act prior to 1975.
The Commodity Futures Modernization Act (CFMA) reauthorized the Commodity Futures Trading Commission for five years and overhauled the Commodity Exchange Act to create a flexible structure for the regulation of futures and options trading. Significantly, the CFMA codified an agreement between the CFTC (Commodity Futures Trading Commission) and the Securities and Exchange Commission to repeal the 18-year-old ban on the trading of single stock futures.
Commodity Futures Trading Commission (CFTC) is the federal regulatory agency established in 1974 that administers the Commodity Exchange Act. The CFTC monitors the futures and options on futures markets in the United States.
Commodity option is an option on a commodity or a futures contract.
Commodity Pool (also referred to as a Pool) is an enterprise, investment trust, syndicate, or similar form of enterprise in which funds contributed by a number of persons are combined for the purpose of trading futures or options contracts. The Commodity Pool concept is similar to a mutual fund in the securities industry. Typically thought of as an enterprise engaged in the business of investing the collective or "pooled" funds of multiple participants in trading commodity futures or options, where participants share in profits and losses on a pro rata basis.
Commodity Pool Operator (CPO) is a person engaged in a business similar to an investment trust or a syndicate and who solicits or accepts funds, securities, or property for the purpose of trading commodity futures contracts or commodity options. The commodity pool operator either itself makes trading decisions on behalf of the pool or engages a commodity trading advisor to do so.
Commodity Price Index is an index or average, which may be weighted, of selected commodity prices, intended to be representative of the markets in general or a specific subset of commodities, e.g., grains or livestock.
Commodity Swap is a swap in which the payout to at least one counterparty is based on the price of a commodity or the level of a commodity index.
Commodity Trading Advisor (CTA) is a person who, for compensation (for pay) or profit, directly or indirectly advises others as to the value of commodity futures or the advisability of buying or selling futures or commodity options, or issues analyses or reports concerning commodity futures or options. Providing advice by Commodity Trading Advisor includes exercising trading authority over a customer's account. A Commodity Trading Advisor may be required to be registered with the CFTC (Commodity Futures Trading Commission).
Commodity-Linked Bond is a bond in which payment to the investor is dependent to a certain extent on the price level of a commodity, such as crude oil, gold, or silver, at maturity.
Confirmation Statement is a statement sent by a Futures Commission Merchant (FCM) to a customer when a futures or options position has been initiated. The statement shows the price and the number of contracts bought or sold. Sometimes Confirmation Statement is combined with a Purchase and Sale Statement.
Congestion is a market situation in which shorts attempting to cover their positions are unable to find an adequate supply of contracts provided by longs willing to liquidate or by new sellers willing to enter the market, except at sharply higher prices (see Squeeze, Corner ). In technical analysis, Congestion is a period of time characterized by repetitious and limited price fluctuations.
Consignment is a shipment made by a producer or dealer to an agent elsewhere with the understanding that the commodities in question will be cared for or sold at the highest obtainable price. Title to the merchandise shipped on consignment rests with the shipper until the goods are disposed of according to agreement.
Contango is a market situation in which prices in succeeding delivery months are progressively higher than in the nearest delivery month; the opposite of backwardation.
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.
Contract Grades are those grades of a commodity that have been officially approved by an exchange as deliverable in settlement of a futures contract.
Contract Market (also referred to as an Exchange) is a board of trade designated by the CFTC (Commodity Futures Trading Commission) to trade futures or options contracts on a particular commodity. Commonly used to mean any exchange on which futures are traded. A contract market can allow both institutional and retail participants and can list for trading futures contracts on any commodity, provided that each contract is not readily susceptible to manipulation. Contract Market is also called designated contract market.
Contract Month (also referred to as Delivery Month) is the month in which delivery is to be made in accordance with the terms of the futures contract.
Contract Size ( also referred to as Contract Unit) is the actual amount of a commodity represented in a contract.
Controlled Account is an account for which trading is directed by someone other than the owner. Also called a Managed Account or a Discretionary Account.
Convergence (also referred to as a "narrowing of the basis") is the tendency for prices of physical commodities and futures to approach one another, usually during the delivery month.
Conversion is a position created by selling a call option, buying a put option, and buying the underlying instrument (for example, a futures contract), where the options have the same strike price and the same expiration.
Conversion Factors are numbers published by futures exchanges to determine invoice prices for debt instruments deliverable against bond or note futures contracts. A separate conversion factor is published for each deliverable instrument.
Core Principle is a provision of the Commodity Exchange Act with which a contract market, derivatives transaction execution facility, or derivatives clearing organization must comply on an ongoing basis. There are 18 core principles for contract markets, 9 core principles for derivatives transaction execution facilities, and 14 core principles for derivatives clearing organizations.
Corner is a securing such relative control of a commodity that its price can be manipulated, that is, can be controlled by the creator of the corner. Corner could be refer in the extreme situation as to obtain contracts requiring the delivery of more commodities than are available for delivery.
Correction is a temporary decline in prices during a bull market that partially reverses the previous rally. Correction is not considered as Bear Market, but rather as a temporary move down.
S&F (Cost and Freight) paid to a point of destination and included in the price quoted. S&F is the same as C.A.F.
Cost of Tender is the total of various charges incurred when a commodity is certified and delivered on a futures contract.
Counter-Trend Trading is the method in technical analysis by which a trader takes a position contrary to the current market direction in anticipation of a change in that direction.
Counterparty is the opposite party in a bilateral agreement, contract, or transaction, such as a swap. In the retail foreign exchange (or Forex) context, the party to which a retail customer sends its funds; lawfully, the party must be one of those listed in the Commodity Exchange Act.
Counterparty Risk is the risk associated with the financial stability of the party entered into contract with. Forward contracts impose upon each party the risk that the counterparty will default, but futures contracts executed on a designated contract market are guaranteed against default by the clearing organization.
Coupon Rate (or simply Coupon) is a fixed dollar amount of interest payable per annum, stated as a percentage of principal value, usually payable in semiannual installments.
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.
Covered Option is a short call or put option position which is covered by the sale or purchase of the underlying futures contract or physical commodity. For example, in the case of options on futures contracts, a covered call is a short call position combined with a long futures position. A covered put is a short put position combined with a short futures position.
Cox-Ross-Rubinstein Option Pricing Model is an option pricing model developed by John Cox, Stephen Ross, and Mark Rubinstein that can be adopted to include effects not included in the Black-Scholes Model (e.g., early exercise and price supports).
Crack Spread is a trading strategy in energy futures that involves the simultaneous purchase of crude oil futures and the sale of petroleum product futures to establish a refining margin. Crack Spread also referred to as calculation showing the theoretical market value of petroleum products that could be obtained from a barrel of crude after the oil is refined or cracked. This does not necessarily represent the refining margin because a barrel of crude yields varying amounts of petroleum products.
Credit Default Option is a put option that makes a payoff in the event the issuer of a specified reference asset defaults. Also called default option.
Credit Default Swap is a bilateral over-the-counter (OTC) contract in which the seller agrees to make a payment to the buyer in the event of a specified credit event in exchange for a fixed payment or series of fixed payments; the most common type of credit derivative; also called credit swap; similar to credit default option.
Credit Derivative is an over-the-counter (OTC) derivative designed to assume or shift credit risk, that is, the risk of a credit event such as a default or bankruptcy of a borrower. For example, a lender might use a credit derivative to hedge the risk that a borrower might default or have its credit rating downgraded. Common credit derivatives include credit default options, credit default swaps, credit spread options, downgrade options, and total return swaps.
Credit Event is an event such as a debt default or bankruptcy that will affect the payoff on a credit derivative, as defined in the derivative agreement.
Credit Rating is a rating determined by a rating agency that indicates the agency's opinion of the likelihood that a borrower such as a corporation or sovereign nation will be able to repay its debt. The rating agencies include Standard & Poor's, Fitch, and Moody's.
Credit Spread is the difference between the yield on the debt securities of a particular corporate or sovereign borrower (or a class of borrowers with a specified credit rating) and the yield of similar maturity Treasury debt securities.
Credit Spread Option is an option whose payoff is based on the credit spread between the debt of a particular borrower and similar maturity Treasury debt.
Crop Year is the time period from one harvest to the next, varying according to the commodity (e.g., July 1 to June 30 for wheat; September 1 to August 31 for soybeans).
In foreign exchange, Cross Rate is the price of one currency in terms of another currency in the market of a third country. For example, the exchange rate between Japanese yen and Euros would be considered a cross rate in the U.S. market.
Cross Trading is offsetting or non-competitive match of the buy order of one customer against the sell order of another, a practice that is permissible only when executed in accordance with the Commodity Exchange Act, CFTC (Commodity Futures Trading Commission) rules, and rules of the exchange.
Cross-Hedge (also referred to as Cross-Hedging) is hedging a cash market position in a futures or option contract for a different but price-related commodity (e.g., using soybean meal futures to hedge fish meal)..
Cross-Margining is a procedure for margining related securities, options, and futures contracts jointly when different clearing organizations clear each side of the position.
In the soybean futures market, Crush Spread is the simultaneous purchase of soybean futures and the sale of soybean meal and soybean oil futures to establish a processing margin.
Curb Trading is trading by telephone or by other means that takes place after the official market has closed and that originally took place in the street on the curb outside the market. Under the Commodity Exchange Act and CFTC rules, curb trading is illegal. Also known as kerb trading.
Currency Swap is a swap that involves the exchange of one currency (e.g., U.S. dollars) for another (e.g., Japanese yen) on a specified schedule.
Current Delivery Month (also referred to as Spot Month or Nearby Delivery Month) is the futures contract that matures and becomes deliverable during the present month.
Customer Segregated Funds (also referred to as Segregated Account) is a special account used to hold and separate customers' assets for trading on futures exchanges from those of the broker or firm.
Customer Type Indicator (also referred to as CTI Codes) consists of four identifiers that describe transactions by the type of customer for which a trade is effected. The four codes are:
1) trading by a person who holds trading privileges for his or her own account or an account for which the person has discretion;
2) trading for a clearing member's proprietary account;
3) trading for another person who holds trading privileges who is currently present on the trading floor or for an account controlled by such other person;
4) trading for any other type of customer.
Transaction data classified by the above codes is included in the trade register report produced by a clearing organization.
The Daily Price limit is the maximum price advance or decline from the previous day's settlement price permitted during one trading session, as fixed by the rules of an exchange.
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.