Defining Key Futures and Options Terms
If you plan to trade futures, you need to know what certain terms mean. Key terms in futures and options trading include the following financial words and phrases:
Being short: You’re bearish, or negative on the market, and your goal is to make money when the price of the futures contract that you choose to short falls in price.
Bid: The highest price a buyer is willing to pay.
Delivery: What futures contracts are all about — someone actually delivering or handing something to someone else in exchange for money.
Exercise value: Your cost when you exercise your call option rights, also known as the exercise cost. This is how much the actual options transaction will cost you.
Expiration date: In the context of options, the date the option goes away, along with your rights. In the context of futures, the date at which a contract expires or is no longer trading. In both cases, the expiration date is on the month given in the contract. A September 2015 option expires in September of the year 2015.
Floor brokers: Agents who receive a commission to buy and sell futures contracts for their clients.
Front month: The futures contract month nearest to expiration. As one contract expires, the next contract in line becomes the front month.
Going long: You’re bullish, or positive on the market, and you want to buy something. I’m long oil, in the context of futures trading, means that you own oil futures.
Locals: The people in the trading pits. They’re usually among the first to react to news and other events that affect the markets.
Market order: Taking the prevailing price the market has to offer.
Market quote: The most current price offered by buyers to purchase the option and the price being asked by sellers to give up the option.
Multiplier: The number used to determine how much money you pay when you call away stock and how much you receive when you put stock to someone. It also is used to determine the total value of the option.
Offer: The lowest price a seller is willing to accept.
Option package: The number of shares and name of the security you call away or put to someone.
The pit: Where all futures contracts are traded during a regular-hours trading session in the futures markets.
Premium: The total value of the option you buy or sell, based on the market quote for the option and its multiplier.
Speculators: Traders who try to make money from price fluctuations and do not intend to take actual delivery of the contract.
Stop-loss order: An order that lets you limit losses at or above a certain price. After the market touches the stop price, or the price at which you’ve instructed the broker to sell, a stop-loss order becomes a market order. A buy stop is placed above the market. A sell stop is placed below the market.
Strike price: The price you pay if you exercise your rights. The strike price for an IBM 105 September call is 105.
Supply-and-demand equation: Trader talk referring to whether buyers outnumber sellers. When there are more sellers than buyers, the equation tilts toward supply, and vice versa.
Taking delivery: Taking the product on which you were speculating.
Trailing stop: A self-adjusting stop order that changes automatically as the price of the underlying asset changes.
Underlying security: The stock, which you buy or sell via the options contract. If you own an IBM 105 September call, IBM is the underlying security.