Cabinet Trade or cab: A trade at a half tick used to liquidate deep out-of-the-money options.
Calendar spread: An option strategy which generally involves the purchase of a farther-term option (call or put) and the writing of an equal number of nearer-term options of the same type and strike price. Example: buying 1 XYZ May 60 call (far-term portion of the spread) and writing 1 XYZ March 60 call (near-term portion of the spread). See also Horizontal spread
Calendar spread: The sale of an option with a nearby expiration against the purchase of an option with the same strike price, but a more distant expiration. The loss is limited to the net premium paid, while the maximum profit possible depends on the time value of the distant option when the nearby expires. The strategy takes advantage of time value differentials during periods of relatively flat prices.
Call: The period at market opening or closing during which futures contract prices are established by auction.
Call option: An option contract that gives the owner the right to buy the underlying security at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a call option, the contract represents an obligation to sell the underlying stock if the option is assigned.
Call option: A contract giving the buyer the right to purchase something within a certain period of time at a specified price. The seller receives money (the premium) for the sale of this right. The contract also obligates the seller to deliver, if the buyer exercises his right to purchase.
Capped-style option: A capped option is an option with an established profit cap or cap price. The cap price is equal to the option’s strike price plus a cap interval for a call option or the strike price minus a cap interval for a put option. A capped option is automatically exercised when the underlying security closes at or above the option’s cap price (for a call) or at or below the option’s cap price (for a put).
Carry / carrying cost: The interest expense on money borrowed to finance a securities position.
Carrying charges: The cost of storing a physical commodity, consisting of interest on the invested funds, insurance, storage fees, and other incidental costs. Carrying costs are usually reflected in the difference between futures prices for different delivery months. When futures prices for deferred contract maturities are higher than for nearby maturities, it is a carrying charge market. A full carrying charge market reimburses the owner of the physical commodity for its storage until the delivery date.
Carryover: The portion of existing supplies remaining from a prior production period.
Cash commodity/cash market: The actual or physical commodity. The market in which the physical commodity is traded, as opposed to the futures market, where contracts for future delivery of the physical commodity are traded. See also Actuals .
Cash flow: The cash receipts and payments of a business. This differs from net income after taxes in that non-cash expenses are not included in a cash flow statement. If more cash comes in than goes out, there is a positive cash flow, while more outgoing cash causes a negative cash flow.
Cash forward contract: See Forward contract .
Cash market: A market in which goods are purchased either immediately for cash, as in a cash and carry contract, or where they are contracted for presently, with delivery occurring at the time of payment. All terms of the contract are negotiated between the buyer and seller.
Cash price: The cost of a good or service when purchased for cash. In commodity trading, the cash price is the cost of buying the physical commodity on the current day in the spot market, rather than buying contracts in the futures market.
Cash settlement: Instead of having the actuals delivered, cash is transferred upon settlement.
Cash settlement amount: The difference between the exercise price of the option being exercised and the exercise settlement value of the index on the day the index option is exercised. See also Exercise settlement amount
CBOE: The Chicago Board Options Exchange.
Certificate of Deposit (CD): A large time deposit with a bank, having a specific maturity date and yield stated on the certificate. CDs usually are issued with $100,000 to $1,000,000 face values.
Certificated stock: Stocks of a physical commodity that have been inspected by the exchange and found to be acceptable for delivery on a futures contract. They are stored at designated delivery points.
Charting: When technicians analyze the futures markets, they employ graphs and charts to plot the price movements, volume, open interest, or other statistical indicators of price movement. See also Technical analysis and Bar chart .
Churning: When a broker engages in excessive trading to derive a profit from commissions while ignoring his client’s best interests.
Class of options: A term referring to all options of the same type — either calls or puts — covering the same underlying stock.
Clearing Corporation (aka Clearing House ): The business entity through which transactions executed on the floor of an exchange are settled using a process of matching purchases and sales.
Clearing margin: Funds deposited by a futures commission merchant with its clearing member.
Clearing Member: A member firm of the Clearing Corporation.
Clearing member: A clearinghouse member responsible for executing client trades. Clearing members also monitor the financial capability of their clients by requiring sufficient margins and position reports.
Clearinghouse: An agency associated with an exchange which guarantees all trades, thus assuring contract delivery and/or financial settlement. The clearinghouse becomes the buyer for every seller, and the seller for every buyer.
Close: A reduction or an elimination of an open position by the appropriate offsetting purchase or sale. An existing long option position is closed by a selling transaction. An existing short option position is closed by a purchase transaction. This transaction will reduce the open interest for the specific option involved.
Close or closing range: The range of prices found during the last two minutes of trading. The average price during the “close” is used as the settlement price from which the allowable trading range is set for the following day.
Closing price: T he final price of a security at which a transaction was made. See also Settlement price
Closing transaction: A reduction or an elimination of an open position by the appropriate offsetting purchase or sale. An existing long option position is closed by a selling transaction. An existing short option position is closed by a purchase transaction. This transaction will reduce the open interest for the specific option involved.
Collar: A protective strategy in which a written call and a long put are taken against a previously owned long stock position. The options may have the same strike price or different strike prices and the expiration months may or may not be the same. For example, if the investor previously purchased XYZ Corporation at $46 and it rose to $62, a ‘collar’ involving the purchase of a May 60 put and the writing of a May 65 call could be established as a way of protecting some of the unrealized profit in the XYZ Corporation stock position. The reverse — a long call combined with a written put — might also be used if the investor has previously established a short stock position in XYZ Corporation. See also Fence
Collateral: Securities against which loans are made. If the value of the securities (relative to the loan) declines to an unacceptable level, this triggers a margin call. As such, the investor is asked to post additional collateral or the securities are sold to repay the loan.
Combination: A trading position involving out-of-the-money puts and calls on a one-to-one basis. The puts and calls have different strike prices, but the same expiration and underlying stock. A long combination is when both options are owned, and a short combination is when both options are written. Example: a long combination might be buying 1 XYZ May 60 call, and buying 1 XYZ May 55 put.
Commercials: Firms that are actively hedging their cash grain positions in the futures markets; e.g., millers, exporters, and elevators.
Commission: The fee which clearing-houses charge their clients to buy and sell futures and futures options contracts. The fee that brokers charge their clients is also called a commission.
Commission house: Another term used to describe brokerage firms because they earn their living by charging commissions. See also Futures Commission Merchant .
Commodity: A good or item of trade or commerce. Goods tradable on an exchange, such as corn, gold, or hogs, as distinguished from instruments or other intangibles like T-Bills or stock indexes.
Commodity Credit Corporation (CCC): A government-owned corporation established in 1933 to support prices through purchases of excess crops, to control supply through acreage reduction programs, and to devise export programs.
Commodity Futures Trading Commission (CFTC): A federal regulatory agency established in 1974 to administer the Commodity Exchange Act. This agency monitors the futures and futures options markets through the exchanges, futures commission merchants and their agents, floor brokers, and customers who use the markets for either commercial or investment purposes.
Commodity pool: A venture where several persons contribute funds to trade futures or futures options. A commodity pool is not to be confused with a joint account.
Commodity Pool Operator (CPO): An individual or firm who accepts funds, securities, or property for trading commodity futures contracts, and combines customer funds into pools. The larger the account, or pool, the more staying power the CPO and his clients have. They may be able to last through a dip in prices until the position becomes profitable. CPOs must register with the CFTC and NFA, and are closely regulated.
Commodity Trading Advisor (CTA): An individual or firm who directly or indirectly advises others about buying or selling futures or futures options. Analyses, reports, or newsletters concerning futures may be issued by a CTA; he may also engage in placing trades for other people’s accounts. CTAs are required to be registered with the CFTC and to belong to the NFA.
Commodity-product spread: The simultaneous purchase (or sale) of a commodity and the sale (or purchase) of the products derived from that commodity; for example, buying soybeans and selling soybean oil and meal. This is known as a crush spread. Another example is the crack spread, where the crude oil is purchased and gasoline and heating oil are sold.
Condor spread: A strategy involving four strike prices that has both limited risk and limited profit potential. A long call condor spread is established by buying one call at the lowest strike, writing one call at the second strike, writing another call at the third strike, and buying one call at the fourth (highest) strike. This spread is also referred to as a ‘flat-top butterfly.’
Confirmation statement: After a futures or options position has been initiated, a statement must be issued to the customer by the commission house. The statement contains the number of contracts bought or sold, and the prices at which the transactions occurred, and is sometimes combined with a purchase and sale statement.
Congestion: A charting term used to describe an area of sideways price movement. Such a range is thought to provide support or resistance to price action.
Contango: When the futures price is above the expected future spot price. Consequently, the price will decline to the spot price before the delivery date.
Contingency order: An order to execute a transaction in one security that depends on the price of another security. An example might be: ‘Sell the XYZ May 60 call at 2, contingent upon XYZ stock being at or below $59 1/2.’
Contract: A legally enforceable agreement between two or more parties for performing, or refraining from performing, some specified act; e.g., delivering 5,000 bushels of corn at a specified grade, time, place, and price.
Contract market: Designated by the CFTC, a contract market is a board of trade set up to trade futures or option contracts, and generally means any exchange on which futures are traded. See Board of trade andExchange .
Contract month: The month in which a contract comes due for delivery according to the futures contract terms.
Contract size: The amount of the underlying asset covered by the option contract. This is 100 shares for one equity option unless adjusted for a special event, such as a stock split or a stock dividend, or otherwise special by the listing exchange.
Contrarian theory: A theory suggesting that the general consensus about trends is wrong. The contrarian takes the opposite position from the majority opinion to capitalize on overbought or oversold situations.
Controlled account: See Discretionary accounts .
Convergence: The coming together of futures prices and cash market prices on the last trading day of a futures contract.
Conversion: An investment strategy in which a long put and a short call with the same strike price and expiration are combined with long stock to lock in a nearly riskless profit. For example, buying 100 shares of XYZ stock, writing 1 XYZ May 60 call, and buying 1 XYZ May 60 put at desirable prices. The process of executing these three-sided trades is sometimes called ‘conversion arbitrage.’ See also Reversal / reverse conversion
Conversion: The sale of a cash position and investment of part of the proceeds in the margin for a long futures position. The remaining money is placed in an interest-bearing instrument. This practice allows the investor/dealer to receive high rates of interest, and take delivery of the commodity if needed.
Conversion factor: A figure published by the CBOT used to adjust a T-Bond hedge for the difference in maturity between the T-Bond contract specifications and the T-Bonds being hedged.
Cover: To close out an open position. This term is used most frequently to describe the purchase of an option or stock to close out an existing short position for either a profit or loss.
Cover: Used to indicate the repurchase of previously sold contracts as, he covered his short position. Short covering is synonymous with liquidating a short position or evening up a short position.
Covered call / covered call writing: An option strategy in which a call option is written against an equivalent amount of long stock. Example: writing 2 XYZ May 60 calls while owning 200 shares or more of XYZ stock. See also Buy-write and Overwrite
Covered combination: A strategy in which one call and one put with the same expiration, but different strike prices, are written against each 100 shares of the underlying stock. Example: writing 1 XYZ May 60 call and 1 XYZ May 65 put, and buying 100 shares of XYZ stock. In actuality, this is not a fully ‘covered’ strategy because assignment on the short put would require purchase of additional stock.
Covered option: An open short option position that is fully offset by a corresponding stock or option position. That is, a covered call could be offset by long stock or a long call, while a covered put could be offset by a long put or a short stock position. This insures that if the owner of the option exercises, the writer of the option will not have a problem fulfilling the delivery requirements. See also Uncovered call option writing and Uncovered put option writing
Covered position: A transaction which has been offset with an opposite and equal transaction; for example, if a gold futures contract had been purchased, and later a call option for the same commodity amount and delivery date was sold, the trader’s option position is “covered.” He holds the futures contract deliverable on the option if it is exercised. Also used to indicate the repurchase of previously sold contracts as, he covered his short position.
Covered put / Covered cash-secured put: Cash secured put is an option strategy in which a put option is written against a sufficient amount of cash (or T-bills to pay for the stock purchase if the short option is assigned).
Covered straddle: An option strategy in which one call and one put with the same strike price and expiration are written against each 100 shares of the underlying stock. Example: writing 1 XYZ May 60 call and 1 XYZ May 60 put, and buying 100 shares of XYZ stock. In actuality, this is not a fully ‘covered’ strategy because assignment on the short put would require purchase of additional stock.
Crack spread: A type of commodity-product spread involving the purchase of crude oil futures and the sale of gasoline and heating oil futures.
Credit: Money received in an account either from a deposit or a transaction that results in increasing the account’s cash balance.
Credit spread: A spread strategy that increases the account’s cash balance when it is established. A bull spread with puts and a bear spread with calls are examples of credit spreads.
Cross-hedge: A hedger’s cash commodity and the commodities traded on an exchange are not always of the same type, quality, or grade. Therefore, a hedger may have to select a similar commodity (one with similar price movement) for his hedge. This is known as a “cross-hedge.”
Cross-Margining: The practice employed when related positions are cleared by different clearinghouses. For example, someone may hold a position in IBM stock, a single stock futures contract on IBM, and an option on IBM stock. This lends the account to cross-margining.
Crush spread: A type of commodity-product spread which involves the purchase of soybean futures and the sale of soybean oil and soybean meal futures.
Curvature: A measure of the rate of change in an option’s delta for a one-unit change in the price of the underlying stock. See also Delta
Cycle: The expiration dates applicable to the different series of options. Traditionally, there were three cycles:
|Cycle||Available expiration months|
|January||January / April / July / October|
|February||February / May / August / November|
|March||March / June / September / December|
|Cycle||Available expiration months|
|January||January / April / July / October|
|February||February / May / August / November|
|March||March / June / September / December|