Common Futures Trading Terminology
Physical vs Non-Physical
Some commodities are physical, such as Crude Oil, Grains and metals. Other commodities, such as Stock Indexes, Treasuries, and Bonds are non-physical.
Deliverable vs Cash-Settled
Similarly, some commodities are deliverable in their physical form. This process is used mainly by commercial producers and buyers. Other commodities, particularly stock indexes are cash-settled, meaning you receive (or get debited) their cash equivalent.
Note that just because a commodity is a physical commodity doesn’t mean its deliverable. Mini Gold futures may be deliverable, but their micro-futures may be cash-settled. When trading deliverable products, you must exit before a certain date otherwise you’ll be at risk of delivery.
Most futures and commodity brokers will attempt to send you an email alert or phone call or may have to exit you from the market. Make sure you discuss the exits dates with your brokers and the methods he uses to roll over to the next month.
Last Trading Day
These are two terms and abbreviations you should know: LTD and FND. One thing for certain is that you’ll want to avoid delivery notices and the cost of retendering (reversing delivery).
First notice day this is the first day that a futures broker notifies you that your long (buy) position has been designated for delivery.
the last trading day is literally the “last day” to close out a futures contract before delivery. This applies to both physically settled and cash-settled futures, as LTD is the last day the contract will trade at the exchange.
For cash-settled contracts, like the E-Mini S&P 500 or E-Mini S&P 500 micro, traders who hold long or short futures contracts into the LTD close will have their positions cash-settled–meaning credited to or debited from your account. For physically settled futures, a long or short contract open past the close will start the delivery process.
What Are Price Limits?
Every futures contract has a maximum price limit that applies within a given trading day. There’s a maximum upside limit and downside limit. These limits help ensure an orderly market by limiting both upside and downside risk.
Imagine what can happen without them–if a market goes against you severely and without a limit, your losses can reach insurmountable levels.
If a given price reaches its limit (limit up or limit down) trading may be halted. Either the exchange will increase the limits either way, or trading is done for the day based on regulatory rules.
Each futures contract has its own unique band of limits. Each has a different calculation. Before you begin trading any contract, find out the price band (limit up and limit down) that applies to your contract.
Mark to Market
What Does Mark to Market Mean?
Futures gains and losses are taxed via mark-to-market accounting (MTM). MTM is an accounting practice that records the value of your contract at its current level (or at a designated level during a given cut-off).
For example, at the end of the tax year, any open positions you have on futures may be taxed as a capital gain, or deductible as a capital loss, depending on its closing price at the end of December. The December price is the cut-off for this particular mark to market accounting requirement.
What does it mean to roll over a Position?
A rollover means to close a position in the expiring month’s contract so as to initiate a position in the new month’s contract. There is no automated way to roll over a position. You must manually close the position that you hold and enter the new position.