Futures Trading Glossary

Below is an online glossary of commodity market terminology. Discover a vast wealth of information, futures and options terms and definitions.

Active Month

In the metals markets, the nearest base contract month that is not the current delivery month. The base months for each metal's future are defined by each individual contract. For other contracts, this may designate the closest month to expiration or the expiration month that has the most trading volume.

American Gas Association (AGA)

American Gas Association. Major natural gas industry trade association, based in Alexandria, Virginia AGA conducts technical research and helps create standards for equipment and products involved in every facet of the natural gas industry. It also compiles statistics that are considered industry standards.

American Petroleum Institute (API)

The primary U.S. oil industry trade association, based in Washington, D.C. API conducts research and sets technical standards for industry equipment and products from wellhead to retail outlet. It also compiles statistics that are regarded as industry benchmarks.

API Gravity

The scale was created by the American Petroleum Institute to indicate the ’lightness’ or ’heaviness’ of crude oils and other liquid hydrocarbons. Calibrated in API degrees (or degrees API), it is used to expresses the relative density of oil. The scale is an inverse measure— the lighter the crude the higher the API gravity, and vice versa. The higher the API degree, the higher the market value of the hydrocarbon being measured. Oil with API greater than 30º is termed light; between 22º and 30º, medium; below 22º, heavy; and below 10º, extra heavy.


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.

Associated gas

Natural gas present in a crude oil reservoir, either separate from or in solution with the oil.

Associated Person (AP)

A person, commonly called a commodity broker, associated with and soliciting customers and orders for a futures commission merchant or introducing broker. The AP must pass a Series 3 examination, be licensed by the Commodity Futures Trading Commission and be a member of the National Futures Association.

Back months

The futures or options on futures contracts being traded that are further from expiration that the current or “front month” contract. Also called deferred or distant months.


Market situation in which futures prices are lower in succeeding delivery months. Also known as an inverted market. The opposite of contango.


A unit of volume measure used for petroleum and refined products. 1 barrel = 42 U.S. gallons.

Base Metals

Copper, aluminum, lead, nickel, and tin. These metals are defined as base because they oxidize or corrode relatively easily.


A measured amount in which crude oil and refined product shipments are sent through a pipeline.


In reference to a Natural Gas measure of capacity or supply, a billion cubic feet.


Instrument traded on the cash market representing a debt a government entity or of a company.


The point at which an option buyer or seller experiences no loss and no profit on an option. Call breakeven equals the strike price plus the premium; put breakeven equals the strike price minus the premium.

British thermal unit (BTU)

The amount of heat required to increase the temperature of a pound of water 1o Fahrenheit. A Btu is used as a common measure of heating value for different fuels. Prices of different fuels and their units of measure (dollars per barrel of crude, dollars per ton of coal, cents per gallon of gasoline, cents per thousand cubic feet of natural gas) can be easily compared when expressed as dollars and cents per million Btus.

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.

Cash settlement

A settlement method used in certain future and option contracts where, upon expiration or exercise, the buyer does not receive the underlying commodity but the associated cash position. For buyers not wishing to take actual possession of the underlying physical commodity, cash settlement is sometimes a more convenient method of transacting business. For example, the purchaser of an E-mini S&P future is unable to take ownership of the index at expiration. Therefore he simply pays or receives the difference between the purchase price and the price of S&P futures contract at settlement.

Central bank

A government bank that regulates a country’s banks and manages a nation’s monetary policy. The Federal Reserve is the central bank in the United States, whereas the European Central Bank (ECB) is the central bank of the European Monetary Union.


The procedure through which Clearing House becomes the buyer to each seller of a futures contract, and the seller to each buyer, and assumes responsibility for protecting buyers and sellers from financial loss by ensuring buyer and seller performance on each contract. This is effected through the clearing process, in which transactions are matched, confirming that both the buyer’s and the seller’s trade information are in agreement.

Clearing fee

A fee charged by the exchange for each contract cleared. There are also clearing fees associated with deliveries, creation of a futures position resulting from an option exercise or assignment, Exchange for Physicals (EFP), block trades, transfer trades and adjustments.

Clearing firm

A firm approved to clear trades through Clearing House. Memberships in clearing organizations are usually held by companies. Clearing members are responsible for the financial commitments of customers that clear through their firm.


The onetime fee charged by a broker to a customer when the customer executes a futures or option on futures trade through the brokerage firm.

Commodity exchange

An exchange that lists designated futures contracts for the trading of various types of derivative products and allows use of its facilities by traders.

Commodity trading advisor (CTA)

A person who, for compensation or profit, directly or indirectly advises others as to the value or the advisability of buying or selling futures contracts or commodity options. Advising indirectly includes exercising trading authority over a customer’s account as well as providing recommendations through written publications or other media.

Consumer Price Index (CPI)

A measuring the average price of consumer goods and services purchased by U.S. households. It is one of several price indices calculated by national statistical agencies. The percent change in the CPI is a measure of inflation. The CPI can be used to index (i.e., adjust for the effects of inflation) wages, salaries, pensions, or regulated or contracted prices.

Contango Market

A market situation in which prices are higher in the succeeding delivery months than in the nearest delivery month. Opposite of backwardation.


Depending on the context in which it is used, a term of reference describing either a unit of trading in a particular futures, options or cleared product or a product approved and designated by the Board for trading or clearing pursuant to the rules of the Exchange.

Contract size

The actual amount of a commodity represented in a futures or options contract as specified in the contract specifications.


The interest rate on a debt instrument expressed in terms of a percent on an annualized basis that the issuer guarantees to pay the holder until maturity.

Credit Derivative

A credit derivative is a contractual agreement designed to shift credit risk between parties. Originally used primarily by banks to hedge and diversify the credit risk of their customers in the event they could not pay back their loans. In most basic terms, a credit default swap is similar to an insurance contract, providing the buyer, usually a debt holder, with protection against the borrower not repaying the debt.

Cross hedging

Hedging a cash commodity using a different but related futures contract when there is no futures contract for the cash commodity being hedged and the cash and futures markets follow similar price trends (e.g., using soybean meal futures to hedge fish meal).

Cross rate

The exchange rate between two currencies, in which the home country’s currency is not included. In the U.S., the Euro/Yen rate would be considered a cross rate, while in Europe or Japan it would be considered a primary pair.

Crude Oil

A mixture of hydrocarbons that exists as a liquid in natural underground reservoirs and remains liquid at atmospheric pressure after passing through surface separating facilities. Crude is the raw material which is refined into gasoline, heating oil, jet fuel, propane, petrochemicals, and other products.

Cubic Foot

The most common measure of gas volume, referring to the amount of gas needed to fill a volume of one cubic foot at 14.73 pounds per square inch absolute pressure and 60 degrees Fahrenheit. One cubic foot of natural gas contains, on average, 1,027 Btus.

Current yield

A term used frequently in bond transactions. Current yield is computed by dividing the annual amount of interest by the price paid for the bond or security. If the security is purchased at a discount from the par or principal value, the current yield with be higher than the stated interest or coupon rate.

Cushion Gas

The amount of gas required in a storage pool to maintain sufficient pressure to keep the working gas recoverable.

Day trading

Establishing a position or multiple positions and then offsetting them within the same day, ending the day with no established position in the market.


A financial instrument whose value is based upon other financial instruments, such as a stock index, interest rates or commodity indexes.

Diesel Fuel

Distillate fuel oil used in compression-ignition engines. It is similar to home heating oil, but must meet a cetane number specification of 40 or more.


(1) The amount a price would be reduced to purchase a commodity of lesser grade; (2) sometimes used to refer to the price difference between futures of different delivery months, as in the phrase “July is trading at a discount to May”, indicating that the price of the July futures contract is lower than that of May; (3) applied to cash grain prices that are below the futures price.

Discount rate

The interest rate that an eligible depository institution is charged to borrow short-term funds directly from a Federal Reserve Bank.

Distillate Fuel Oil

Products of refinery distillation sometimes referred to as middle distillates; kerosene, diesel fuel, and home heating oil.


A Petroleum industry term referring to commercial oil and gas operations beyond the production phase; oil refining and marketing, and natural gas transmission and distribution.

Electronic trading

A computerized system for placing orders, bid and offer posting, and trade execution. The CME Globex platform is an example of an electronic trading system.


(1) Instrument traded on the cash market representing a share in the capital of a company; (2) The net value of a commodity account as determined by combining the ledger balance with an unrealized gain or loss in open positions as marked to the market.

Exchange of Futures for Cash

A transaction in which the buyer of a cash commodity transfers to the seller a corresponding amount of long futures contracts, or receives from the seller a corresponding amount of short futures, at a price difference mutually agreed upon. In this way, the opposite hedges in futures of both parties are closed out simultaneously.

Exchange traded funds

Shares issued by financial institutions that allow participants to trade benchmark indexes like a stock.


The last day of trading for a futures contract. The last day on which an option may be exercised and exchanged for the underlying contract.

Extrinsic value

The amount of money option buyers are willing to pay for an option in the anticipation that, over time, a change in the underlying futures price will cause the option to increase in value. In general, an option premium is the sum of time value and intrinsic value. Any amount by which an option premium exceeds the option’s intrinsic value can be considered time value.

Fair Value (Futures)

Most frequently used in reference to a stock index futures contract price being in equilibrium to the underlying cash index. The equilibrium to the futures price would be the spot price after considering compounded interest (and dividends not received due to being long the futures contract rather than the physical stocks) over a period of time.

Federal funds

In the United States, federal funds are bank reserves at the Federal Reserve. Banks keep reserves at Federal Reserve Banks to meet their reserve requirements and to clear financial transactions. Transactions in the federal funds market enable depository institutions with reserve balances in excess of reserve requirements to lend reserves to institutions with reserve deficiencies. These loans are usually made for 1 day only, i.e. “overnight.” The interest rate at which the funds are lent is called the federal funds rate.

Federal funds rate

The rate of interest charged for the use of federal funds. See federal funds.

Federal Reserve System (Fed)

The central banking system of the United States. Created in 1913 by the enactment of the Federal Reserve Act, it is a quasi-public (part private, part government) banking system composed of (1) the presidentially-appointed Board of Governors of the Federal Reserve System in Washington, D.C.; (2) the Federal Open Market Committee; (3) 12 regional Federal Reserve Banks located in major cities throughout the nation acting as fiscal agents for the U.S. Treasury. The current Federal Reserve Chairman is Dr. Ben S. Bernanke.

Foreign Exchange Market (FX)

The exchange of one currency for another. Markets exist in over-the-counter, forward and FX Futures where buyers and sellers conduct foreign exchange transactions. CME® FX futures offer financial institutions, investment managers, corporations and private investors ways manage the risks associated with currency rate fluctuation and to take advantage of profit opportunities stemming from changes in currency rates.

Forward contract

A private, cash-market agreement between a buyer and seller for the future delivery of a commodity at an agreed price. In contrast to futures contracts, forward contracts are not standardized and not transferable.

Fuel Oil

Refined petroleum products used as a fuel for home heating and industrial and utility boilers. Fuel oil is divided into two broad categories, distillate fuel oil, also known as No. 2 fuel, gasoil, or diesel fuel; and residual fuel oil, also known as No. 6 fuel, or outside the United States, just as fuel oil. No. 2 fuel is a light oil used for home heating, in compression ignition engines, and in light industrial applications. No. 6 oil is a heavy fuel used in large commercial, industrial, and electric utility boilers.


Standardized contracts for the purchase and sale of financial instruments or physical commodities for future delivery on a regulated commodity futures exchange.

Futures commission merchant (FCM)

An individual or organization that solicits or accepts orders to buy or sell futures or options on futures contracts and accepts money or other assets from customers in connection with such orders. An FCM must be registered with the CFTC.

Futures contract

A legally binding agreement to buy or sell a commodity or financial instrument at a later date pursuant to the Rules of the Exchange.

Futures exchange

A board of trade designated by the Commodity Futures Trading Commission to trade futures or option contracts on a particular commodity. Commonly used to mean any exchange on which futures are traded. CME Group including all its divisions.

Grade 1 Copper

Copper which is good for delivery against the COMEX Division high grade copper futures contract and meets the ASTM specification B115-91.

Gross Domestic Product

One of the ways of measuring the size of the economy. GDP is defined as the total market value of all final goods and services produced within a country in a given period of time (usually a calendar year).

Heating Oil

No. 2 fuel oil, a distillate fuel oil used either for domestic heating or in moderate capacity commercial-industrial burners.

Heavy Crude

Crude oil with a high specific gravity and a low API gravity due to the presence of a high proportion of heavy hydrocarbon fractions.


The purchase or sale of a futures contract as a temporary substitute for a cash market transaction to be made at a later date. Usually involves simultaneous, opposite positions in the cash market and futures market.


Taking a position in a futures market opposite to a position held in the cash market to minimize the risk of financial loss from an adverse price change; (2) A purchase or sale of futures as a temporary substitute for a cash transaction which will occur later. See long hedge and short hedge.

Historical volatility

The volatility of a financial instrument based on historical returns. This phrase is used particularly when it is wished to distinguish between the actual volatility of an instrument in the past, and the current volatility implied by the market.


Organic chemical compounds containing hydrogen and carbon atoms. They form the basis of all petroleum products.

Implied volatility

The volatility implied by the market price of the option based on an option pricing model. In other words, it is the volatility that, given a particular pricing model, yields a theoretical value for the option equal to the current market price.


An indicator that is representative of a whole market or market segment, usually computed by a sum product of a list of instruments’ current prices and a list of weights assigned to these instruments. The index variations give trends of the market/market segment measured.


An economic term describing conditions in which overall prices for goods and services are rising.

Leading indicators

Market indicators that signal the state of the economy for the coming months. Some of the leading indicators include: average manufacturing workweek, initial claims for unemployment insurance, orders for consumer goods and material, percentage of companies reporting slower deliveries, change in manufacturers’ unfilled orders for durable goods, plant and equipment orders, new building permits, index of consumer expectations, change in material prices, prices of stocks, change in money supply.


The ability to control large dollar amounts of a commodity with a comparatively small amount of capital.

Light Crude

Crude oil with a low specific gravity and high API gravity due to the presence of a high proportion of light hydrocarbon fractions.

Liquefied Natural Gas (LNG)

Natural gas which has been made liquid by reducing its temperature to minus 258 degrees Fahrenheit at atmospheric pressure. Its volume is 1/600 of gas in vapor form.

Liquefied Petroleum Gas (LPG)

Propane, butane, or propane-butane mixtures derived from crude oil refining or natural gas fractionation. For convenience of transportation, these gases are liquefied through pressurization.


A characteristic of a security or commodity market with enough units outstanding to allow large transactions without a substantial change in price. Institutional investors are inclined to seek out liquid investments so that their trading activity will not influence the market price.


A condition that describes the ability to execute orders of any size quickly and efficiently without a substantial affect on the price. Institutional investors are inclined to seek out liquid investments so that their trading activity will not influence the market price.

Liquidity data bank

A computerized profile of CBOT market activity, used by technical traders to analyze price trends and develop trading strategies. There is a specialized display of daily volume data and time distribution of prices for every commodity traded on the Chicago Board of Trade.


A unit of trading (used to describe a designated number of contracts). For example, a trade quantity of one equals a “one lot;” a trade quantity of four equals a “four lot.” Also called cars.


To debit or credit on a daily basis a margin account based on the close of that day’s trading session. In this way, buyers and sellers are protected against the possibility of contract default.


Period within which a futures contract can be settled by delivery of the actual commodity; the period between the first notice day and the last trading day of a commodity futures contract.

Million British Thermal Units (MMBtu)

Approximately equal to a thousand cubic feet (Mcf) of natural gas. Also known as Dekatherm.

Money supply

The amount of money in the economy, consisting primarily of currency in circulation plus deposits in banks: M-1 U.S. money supply consisting of currency held by the public, traveler’s checks, checking account funds, NOW and super- NOW accounts, automatic transfer service accounts, and balances in credit unions. M-2 U.S. money supply consisting M-1 plus savings and small time deposits (less than $100,000) at depository institutions, overnight repurchase agreements at commercial banks, and money market mutual fund accounts. M-3 U.S. money supply consisting of M-2 plus large time deposits ($100,000 or more) at depository institutions, repurchase agreements with maturities longer than one day at commercial banks, and institutional money market accounts.

Negative yield curve

A chart in which the yield level is plot on the vertical axis and the term to maturity of debt instruments of similar creditworthiness is plotted on the horizontal axis. The yield curve is positive when long-term rates are higher than short-term rates. However, the yield curve is referred to as negative or inverted as short term rates begin to rise above longer term ones.

Nominal Price

The declared price for a futures month sometimes used in place of a closing price when no recent trading has taken place in that particular delivery month; usually an average of the bid and asked prices.

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 or fulfilled by delivery Also known as Open Contracts or Open Commitments. Each open transaction has a buyer and a seller, but for calculation of open interest, only one side of the contract is counted.

Open market operation

The buying and selling of government securities Treasury bills, notes, and bonds by the Federal Reserve.

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.


An intermediate chemical derived from petroleum, hydrocarbon liquids, or natural gas, such as ethylene, propylene, benzene, toluene, and xylene.

Primary market

(1) For producers, their major purchaser of commodities; (2) in commercial marketing channels, an important center at which spot commodities are concentrated for shipment to terminal markets; and (3) to processors, the market that is the major supplier of their commodity needs.

Producer Price Index (PPI)

A measure of the average change in prices received by domestic producers for their output. Most of the data is collected through a systematic sampling of producers in manufacturing, mining, and service industries, and is published monthly by the Bureau of Labor Statistics.


A company that acts as a wholesaler of gasoline, heating oil, or other products which operates its own refinery; may also retail and buy additional supplies to supplement its own refining output.

Residual Fuel Oil

Heavy fuel oil produced from the residue in the fractional distillation process rather than from the distilled fractions.


As pertaining to an existing futures position, exiting your current delivery month and entering the next expiring month. For example, if long a December contract, offsetting that position (by selling) and entering a postion in the next expiration (by buying).


To trade for small gains. Scalping normally involves establishing and liquidating a position quickly, usually within seconds.

Secondary market

Market where previously issued securities are bought and sold.

Selling climax

An extraordinarily high volume occurring suddenly in a downtrend, signaling the end of the trend.

Settlement price

The official daily closing price of futures and options on futures contracts, as determined in accordance with Rule 813, used by the Clearing House for marking all open positions at the close of the daily settlement cycle.


A Seek Limit order has a price limit automatically assigned (up to the fifth best price level) to the order when sent and seeks to fill the entire quantity. Available only on CME Globex Trader.

Short-term interest rates

Interest rates on loan contracts–or debt instruments such as Treasury bills, bank certificates of deposit, or commercial paper–having maturities of less than one year. Often called money market rates.

Sour or Sweet Crude

Industry terms which denote the relative degree of a given crude oil’s sulfur content. Sour crude refers to those crudes with a comparatively high sulfur content, 0.5% by weight and above; sweet refers to those crudes with sulfur content of less than 0.5%.


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.

Spot market

The market in which cash transactions for the physical commodity occurs — (cattle, currencies, stocks, etc.) are bought and sold for cash and delivered immediately.


The price difference between two contracts. Holding a long and a short position in two or more related futures or options on futures contracts, with the objective of profiting from a change in the price relationship.

Standard deviation

A representation of the risk associated with a financial instrument (stocks, bonds, etc.) or a portfolio of investments. The larger the standard deviation in a given period, the greater implied risk. Risk is an important factor in determining how to efficiently manage investments and understanding the standard deviation gives investors a statistical basis for their decisions.

Stock index

A statistic reflecting the composite value of a selected group of stocks. How a particular stock index tracks the overall market depends on the sampling of stocks, the weighing of individual stocks, and the method of averaging used to establish the index. Many indexes are used to benchmark the performance of portfolios such as mutual funds.

Swap (OTC)

A custom-tailored, individually negotiated transaction designed to manage financial risk, usually over a period of one to 12 years. Swaps can be conducted directly by two counterparties, or through a third party such as a bank or brokerage house. The writer of the swap, such as a bank or brokerage house, may elect to assume the risk itself, or manage its own market exposure on an exchange. Swap transactions include interest rate swaps, currency swaps, and price swaps for commodities, including energy and metals. In a typical commodity or price swap, parties exchange payments based on changes in the price of a commodity or a market index, while fixing the price they effectively pay for the physical commodity. The transaction enables each party to manage exposure to commodity prices or index values. Settlements are usually made in cash.


Simultaneous purchase and sale of currencies or interest rate products in spot and forward market transactions.

Treasury Bill

A Treasury bill is a short-term U.S. government obligation with an original maturity of one year or less. Unlike a bond or note, a bill does not pay a semi-annual, fixed rate coupon. A bill is typically issued at a price below its par value and is therefore a discounted instrument. The level of the discount depends on the level of prevailing interest rates. In general, the higher short-term interest rates are, the greater the discount. The return to an investor in bills is simply the difference between the issue price and par value.

Treasury Bond

Government-debt security with a coupon and original maturity of more than 10 years. Interest is paid semiannually.

Treasury Note

Government-debt security with a coupon and original maturity of one to 10 years.

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.


A measurement of the change in price over a given time period.


The number of contracts in futures or options on futures transacted during a specified period of time.

Warrant (Metals)

A document of title issued by a warehouse or depository for a specific lot of stored metal that meets the specifications of the corresponding Exchange metals futures contract. Metal that is “on warrant” is eligible for delivery against a short position on the Exchange.

West Texas Intermediate (WTI)

A grade of crude oil deliverable against the New York Mercantile Exchange light, sweet crude oil contract. Nominally, the benchmark crude of the U.S. oil industry.

Wire house

An individual or organization that solicits or accepts orders to buy or sell futures contracts or options on futures and accepts money or other assets from customers to support such orders. Also referred to as “commission house” or Futures Commission Merchant (FCM).


1) A measure of the annual return on an investment expressed as a percentage. 2) The proportion of heavy or light products which can be derived from a given barrel of crude oil.

Yield change

One day’s change in the futures’ interest rate – equal and opposite to change in the settlement price.

Yield curve

A chart that graphically depicts the yields of different maturity bonds of the same credit quality and type. Yield is depicted on the vertical axis and maturity on the horizontal axis. A normal yield curve is upward-sloping, with short-term rates lower than long-term rates. An inverted yield curve is downward sloping, with short-term rates higher than long-term rates. A flat yield curve occurs when short-term rates are the same as long-term rates.


The rate of return an investor receives if a fixed-income security is held to maturity.

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