Chapter 1-4 Comodity Trading Terminology

Spread = The term spread is used loosely within the futures industry, and unless you are familiar with all the different uses of the word, you might be leaving yourself vulnerable to expensive miscommunications. Here are a few of the broadest contexts in which you will hear spread used.

Bid/Ask Spread = The spread between the bid and the ask represents the difference in the highest price that a buyer is willing to pay (or the price you can sell it for) and the lowest price that the seller is willing to accept (or the price you can buy it for). In essence, at any given time and in any market, there will always be a price at which you can buy an asset for and a price that the asset can be sold for. The “spread” between the two prices is known as the bid/ask spread.  Once again, the beneficiary of the spread is the floor broker that takes the other side of your trade.

In conversation, traders and brokers typically refer to the bid/ask spread simply as the spread. Thus, any time that you converse about the price of a commodity option or futures contract and someone mentions the spread, they are referring to the bid/ask spread.

Unfortunately, as a retail trader, you will always be forced to pay the ask when buying and sell the bid when going short. In other words, if you simultaneously bought and sold a futures contract, you would immediately lose the difference between the spread. Accordingly, you might hear your broker say that you need to pay the spread or pay the ask to get into a trade. This can come up if a limit order goes unfilled, and it seems as though you need to increase your limit price to, or closer to, the ask to get filled. Similarly, if you hit the bid, you are agreeing to sell the contract at the bid price.

Option Spread = You rarely hear a broker or trader refer to an option spread as such; it is typically shortened to spread. When referring to the bid and ask of an option spread, a spread of a spread, the price quote is normally identified as the bid/ask, whereas the option spread is still referred to by a single word: spread. In reference to a spread between call options, it is common to hear call spread and those with puts as put spread. With that said, brokers have been creative in labeling specific types of option spreads with shortened terms. For example a put butterfly is known as a put-fly.

Futures Spread = Based on my experience, option spreads are more common than futures spreads among retail traders. Perhaps this is why option spreads have become the default strategy identified by the single word spread. Futures spreads are normally referred to in conjunction with the contracts involved. For instance, a trader who is spreading July and December corn might refer to it as a Dec/July corn spread.

Red Months = Clearly there is one of each of the twelve months every year; therefore, it is necessary to distinguish between futures contracts expiring in March (or any other month) of the current year from that expiring in March of the following year. If there is no reference to the year, it is assumed to be the closest to expiration. In instances in which a trader or broker refers to the following year, the term “red” is used to indentify it as such. Thus, in January 2010 a trader looking to speculate on March 2011 futures would refer to the contract as red March.

Fill = A fill is simply a price at which an order was executed. You might often hear it referred to as a fill price. Explicitly, if a trader buys a T-Bond 125 call option for 1 15/64ths, 1 15/64ths is said to be the fill price.

Split Fill = A split fill occurs when a trader places an order to buy or sell a futures contract or option in a quantity in excess of one contract and receives a fill reported at more than one price. In other words, if a trader places an order to buy 10 December note futures at the market, the fills on each, or some, might be reported at different prices. For instance, a trader might buy four at 119’20, five at 119’20.5, and one at 119’21 and would be said to have gotten a split fill.

Partial Fill = A partial fill occurs when some, but not all, of the stated quantity of a limit order (an order to buy or sell an asset at a specific price) is filled. Going back to our note futures example, if the order were placed to buy 10 December note futures at 119’20, and that was the low print of the day; it is possible that only a handful of the ten contracts would be filled. Remember, in the case of a limit order, the market has to “go through it to do it.” A trader isn’t owed a fill unless the price ticks below the limit price. Had the low of the day been 119’19.5 (one tick below the limit price), the trader could have challenged any lack of fill on the trade.

Blow Out = For many, commodity trading is their first experience with leverage and margin.  Beginners often underestimate the amount of control that a margin department rightfully has over their trading account in the case of an undercapitalized account.  A margin clerk, and even a broker responsible for a given account, is authorized to do whatever is in her power to prevent a trading account from going negative (losing more than the funds on deposit). For an account that is liquidated in this manner by someone other than the account owner, it is said to have been blown out. Similarly, an account on a persistent margin call might be liquidated to satisfy the exchange margin. This is also considered a blowout.

Blow Up = A blow up is similar to a blowout, with the primary difference being who pulls the plug on a trade or an account. Thus, if a trader determines that she is undercapitalized and in danger of losing more money than was deposited in the account, she can liquidate the positions at her own hand and detriment. This would be referred to as a blow up.  During the 2007/2008 commodity bubble, you likely heard of the many hedge fund blow ups. These were funds that simply lost all or most of the money deposited in their fund and could no longer continue trading.  Keep in mind that for all intents and purposes, blow up and blowout can be used interchangeably, but their most common interpretations are as previously noted.

Keypunch Error = A keypunch error is just as it sounds. It occurs when a back office brokerage employee or trading pit clerk mistypes a fill price, account number, quantity, or symbol on a reported fill. Given the massive volume and human involvement in open outcry trading, keypunch errors can and will happen. Fortunately, keypunch errors have been reduced dramatically by technology and electronic trade execution. If you notice what you believe to be a keypunch error in your account, contact your broker immediately rather than trying to trade out of it or offset the position.

As an account holder, if you attempt to exit a trade that was inadvertently placed in your account, you are responsible for the order that you entered, even though it was done so as an attempt to eliminate a keypunch error. Unfortunately, history has witnessed the peril of such actions, and we urge you to keep proper trading records and know your positions to ensure that this does not happen to you.

Busted Trade = A busted trade is most often the result of a keypunch error and is simply a position that is removed from a client account due to an error of some kind.  When a trade is busted or moved from an account, the account in which it is moved from stands as if it never happened. The erroneous trade along with any commission and fees attached to the position are completely removed from the trading account.

To the surprise of many, it is possible for trades executed on behalf of one client to be inadvertently entered into the account of another client. With thousands of trades being executed on a daily basis, it isn’t hard to imagine a clerk on the floor mistyping a digit of an account number. This is the most common need for a busted trade.

A busted trade can also occur when the original fill was reported at an erroneous price (keypunch error), making it necessary to remove the executed trade at the incorrect price (busted the trade) and replacing it with an accurate fill price.

It might also be necessary to bust a trade from a client’s account if the floor broker accidentally reported a fill that should have never been triggered. For example, if a trader places a stop order to sell December gold at $860.00 and a fill is reported despite the fact that the market never reached the stated price, the trade will be busted (removed) from the account.

Some traders will refer to this practice as a moved trade as if the terms are synonymous, but in reality there is a small discrepancy between the two. Moved trades are normally used to describe a situation in which a trade made it into the wrong client account; busted trades can be used in the same circumstances but can also be used in reference to inaccurate fill prices and erroneously elected orders.

If you notice that your statement shows a position that isn’t yours, you are missing a position that should be yours, or what seems to be an inaccurate fill price, immediately contact your broker. Don’t panic, and whatever you do don’t try to offset a trade that isn’t yours or reestablish one that is missing. It is highly likely that the absent or mysterious trade or incorrect fill was the result of a keypunch error and can easily be corrected. Any client attempt to “correct” the situation could lead to substantial chaos and large monetary damage.

Remember, whether it is a winning or losing position, if you didn’t place or authorize the order, it isn’t yours-regardless of what might be showing in your account. Additionally, the person who did place the order and expected to see the position on her statement is likely looking for it.

Fortunately, busted or moved trades are becoming less and less frequent due to electronically executed futures and options. During the hay day of open outcry trading pits, they were commonplace.

Net Liquidity = Futures and options brokers will often use the term net liq to refer to the net liquidation value of an account. The net liquidation value is simply a snapshot of what the account would be worth if all open positions were closed at the prices displayed in the account. Please note that assuming that the positions held in the account could be liquidated at the displayed prices is unrealistic in that it doesn’t reflect the impact of the bid ask spread or any price change not accounted for in the snapshot.  Additionally, in the case of intraday net liq values for accounts that are holding option positions, the most recent quote might not necessarily accurately reflect market value due to the amount of time that sometimes passes between fills of a given option contract. Nonetheless, despite its imperfections, this is the number that you should pay the most attention to on your brokerage statement and any intraday views of your account status.

It is important to realize that values displayed on account statements reflect the price at which all positions were assigned at the close of a given trading session. In a 24-hour marketplace, statement values often differ greatly from actual market values almost immediately after they are issued.

Equity = Equity is a word that is used in the world of finance in a ridiculous number of contexts. However, in futures trading, the term equity is most commonly used to describe the amount of cash held in a given account. Unlike the net liquidation value, which gives you a bottom-line figure, your account equity is the top-line figure. Plainly, it is the beginning cash balance in an account before accounting for any premium paid for long options, premium collected for short options, and profit or loss sustained on open futures positions (unrealized profits and losses).

Before we look at details, you should know that option trades result in immediate cash in-flows (selling) or out-flows (buying). Trading futures, on the other hand, does not result in an actual cash transaction until the trade is offset.  With that said, any commission and fees charged will result in a cash transaction immediately.

In essence, if a trader put $5,000 into a new trading account and spends $300 on a March call option in the e-mini S&P, along with another $20 in transaction costs, his account equity would be $4,680 ($5,000 – $300 – $20) because $320 in cash was taken out of the account. The cash left in the account is the equity and is the cash available to use toward margin of a futures position, marginable option spread, or to purchase long options and option spreads. In other words, it is the tradable account balance.

If the same trader went short an April crude oil futures position and has an unrealized loss of $550 after paying $10 in transaction costs to enter the trade, his equity balance would be $4,670 ($4,680 – $10). The $550 unrealized loss in the futures position has not been accounted for because there has yet to be a cash inflow or outflow. Assuming the same trader took the loss of exactly $550, the equity balance would be reduced to $4,120.

On the contrary, when a trader sells an option, there is an immediate cash transaction. Thus, the premium collected is added to the account equity. Using the preceding example, if the trader sold a March ‘S&P put for $900 and paid a transaction fee of $20, the account equity would be back to $5,000 ($4,120 + $900 – $20). As you can see, the account equity gives you little information on the actual progress of the account. This particular trader has sustained a drawdown in net liquidation value in the account by approximately $900, yet his account equity is showing the original deposited amount. Given this example, it is clear that traders should focus on their net liquidation values as opposed to their account equity.

Beans = means soybeans only

Commodity Currencies = Commodity currencies are those that are said to be correlated with the price of commodities. The two most common commodity currencies are the Australian Dollar and the Canadian Dollar; however, you will often hear the New Zealand Dollar lumped into this category. The correlation stems from the idea that the economies backed by the named currencies are tied to commodity valuations. You might recall the Canadian Dollar reaching all-time highs along with crude oil and soybeans in 2007/2008.

Aussie and the Loonie = The Australian and Canadian Dollars have something else in common in that they both have nicknames. The Australian Dollar is often referred to as the Aussie, whereas you might hear industry insiders speak of the Canadian Dollar using the term Loonie.

Pound, Pound Sterling, Sterling, and the Cable = The British Pound is often shortened to the pound, but you can also hear it referred to as the Pound Sterling or the Sterling. Although they are interchangeable, most brokers and traders refer to the currency used in the United Kingdom as the pound. You can also hear traders refer to the relationship between the Pound and the Dollar as the cable.

Dead Cat Bounce = A dead cat bounce is a figure of speech used by industry insiders to describe a scenario in which a substantial decline in a futures market is followed by a temporary bounce in prices. Use of the phrase, dead cat bounce, typically implies that the speaker is expecting the market to resume its down-trend. It is also often the case that the speaker assumes that the subsequent bounce in pricing is mostly the result of short covering in the midst of a technically oversold market.  Remember, if short traders are taking profits, they are buying futures contracts to exit their position. This buying can be enough to artificially prop prices up in the near term.

Bottom Fishing = Bottom fishing is a method of catching fish that are lingering at the bottom of a body of water. In finance, bottom fishing is the art of speculating on a price recovery in a market that is trading at what is considered historically cheap prices.

For instance, as orange juice futures traded near 50 cents in the mid-2000s, there were likely several bottom fishers hoping for an eventual rally, and they got it.  It traded above $2.00 after an active hurricane season caused crop damage in Florida.

Expectations of higher prices typically stem from the cyclical nature of the market in regards to supply and demand. Bottom fishers know that as commodity prices become excessively cheap, producers cut back, and consumers demand more. The subsequent decrease in supply will eventually have a positive impact on price.

Chasing the Market = A trader who enters a market well after a trend is established is said to be chasing the market. This scenario happens when a market has risen or fallen dramatically, and traders try to enter in the direction of the move without regard to their entry price. Unfortunately, those chasing a market tend to regret it later when they discover the hard way that the trend is only your friend until it ends.

History has seen too many inexperienced traders anticipate a market move but talk themselves into waiting for confirmation. In the right context, confirmation might be a wise move. However, if the trader’s idea of confirmation means several weeks or months of favorable market movement, the odds favor the miserable experience of getting into a trade just as the trend is ending. As a trader, you never want to be fashionably late to the party.

Limit Moves = The futures exchanges stipulate specified price limits on most listed contracts.  The largest amount of change that the price of a commodity futures contract is allowed to move in a single trading session is known as the price limit. A limit move is one in which the market rallies or falls in the largest magnitude allowable.

When the daily price limit is reached, it is said to be locked limit. When this occurs, it is not possible to trade a futures contract in the direction of the limit move. Therefore, if the set price limit in corn is 30 cents and the futures market rallies 30 cents, it wouldn’t be possible to buy a corn futures (even if you are short and trying to get out). However, if you have nerves of steel, you could sell the contract. If there are enough sellers at the limit price, the market will eventually move off of its limit and resume trading again.

While a market is locked limit, there are often large numbers of orders waiting to be filled. These orders will be filled only if the market retreats from the limit price or in the following trading session.

Limit Up = This occurs when a market rallies to its daily limit and ceases executing buy orders.

Limit Down = This occurs when the market declines to its daily limit and ceases executing sell orders .

The Tape = The tape, also known as the ticker tape, is a term borrowed from stock traders that originally meant to describe the running record of scrolling paper depicting the trading activity in each individual stock. The advent of computer technology has replaced the ticker tape with electronic records of trading activity.

In commodities, it is often used to refer to the time and sales data, which records each trade price and the quantity of contracts traded at each price.

Trading solutions and front end platforms = The commodity industry is known for unnecessarily complicating otherwise simple terms. An order entry platform that can be used to execute and monitor trades is often referred to as a trading solution or a front-end platform. Simply put, this is either a web-based (accessed via an Internet browser such as’ Microsoft Internet Explorer) or a downloadable software package that can be run directly from a trader’s desktop that provides market access to retail traders.

Proprietary Trading = The word proprietary indicates that a party holds exclusive rights of ownership, control, or use over an item of property whether physical or intellectual. In reference to finance and trading, the term describes the practice in which a firm hires employees to actively trade in the financial markets with the firm’s money as opposed to its customers’ money. The goal is for the employees of the firm to profit from the speculative transactions executed by its employees. Of course, it also accepts the risk of losing trades executed on its behalf by authorized employees. Proprietary trading strategies are characteristically developed in house and are considered trade secrets and are not released to the public.

Prop Desk = A prop desk is a trading desk in which proprietary trading takes place.  When a market makes a quick and sometimes dramatic move through well-known support and resistance areas, it is often the result of stop running. In essence, this is a scenario in which market prices reach levels that contain substantial number of buy or sell stop orders, and prices move rapidly as stop orders are elected. For example, if the S&P 500 futures are trading at 922 with obvious technical support at 920, a price drop below 920 could trigger sell stops placed by those long the market attempting to defend their positions against adverse price moves. If this is the case, there will be a  temporary imbalance of sell orders executed, and it is possible for market prices to drop quickly as the sell stops are filled. When all the sell stop orders placed at or near 920 are executed, it is not uncommon for market valuations to reverse higher. After all, the selling pressure is somewhat artificial in that it isn’t due to new bears entering the market but is the result of bulls exiting positions as sell stops are executed.

There is some speculation as to whether larger market participants actively “seek” stop orders by pushing the market prices to known areas of support and resistance in hopes of triggering stop orders and benefiting from the price moves. However, it is important to note that traders who speculate in markets with ample liquidity shouldn’t believe this to be the case. Conversely, if there are a handful of manipulative traders that can temporarily move the markets on the sheer size of their trading capital, it should be viewed as a market characteristic that can’t be controlled but can be compensated for through trading strategy and decisions.

Short Squeeze = A short squeeze is a rapid increase in market price that occurs when there are large imbalances in buy orders over sell orders. A short squeeze scenario most often occurs when short sellers scramble to offset their open positions by buying their contracts back. As short traders continue to cover positions, there is often a snowball effect in the quantity of buyers and the resulting price increase can be surprisingly dramatic.

Short squeezes often begin as profit taking by the bears but are later fueled by a large quantity of buy stop orders being executed or because the market has rallied enough to force short traders out due to a lack of capital, margin, or faith.

Babysitting = Babysitting a trade is the act of staring at a computer screen or a business news channel in regards to an open speculative position. Although it is true that there is substantial risk in trading and all risk exposure should be responsibly monitored, obsession over market activity could do damage to the psychology involved in the trade.

Traders who are glued to their screens are more likely to give in to the pressures of fear and greed or perhaps the opposite scenario; analysis paralysis. Too much information can sometimes lead to a deer in the headlights reaction to adverse price moves in which the trader marries an open position and refuses to exit before losses mount to devastating levels.  We believe that traders should diligently evaluate their position before entering the market; if this is done properly they should be comfortable enough with the trade to avoid the pressures of living and dying by each market tick.  Hopefully, doing so removes some of the emotion that can negatively dictate trading decisions.

Scalping = Scalping is a day-trading method in which trades are opened and closed in a very short time scale. A scalper typically leaves a position open for anywhere from a second or two to a few minutes. Naturally, the risk and reward per individual trade is relatively low due to the time in which the trader is exposed to price risk.  However, wins and losses can quickly mount along with transaction costs.

Slippage = Slippage is the term used to describe the difference between the estimated fill price and the actual price. For example, if a trader places a buy stop order in January Feeder Cattle at 95.50 and was reported a fill price of 95.70, the trader would have suffered a fill that is 20 points worse than what was anticipated. Remember, a stop order is an order to execute the trade at the market when the named price is reached. Thus, in a fast-moving market, the price can quickly surpass the stop order price and create a scenario in which the fill is significantly unfavorable. Naturally, it goes both ways; it is possible for slippage to have a positive effect on the trader and her account.  However, trust me; slippage typically works against the retail trader.

Slippage can occur with every order type and varies greatly on the market traded. An electronically traded market with ample liquidity such as the e-mini S&P exposes the trader to much less risk of slippage than trading an illiquid and highly volatile market such as lumber.

With that said, though you often hear traders refer to slippage following what they believe to be an unfavorable fill on a market order, it is technically inaccurate. A market order is one in which the trader agrees to pay the best possible price. Because he is not specifying a price, he shouldn’t refer to a deviation of his expected price as slippage but he will. Instead it is simply an unfortunate fill and quite probably the result of wide bid/ask spreads or excessive market volatility.  Conversely, only positive slippage is possible in a limit order. When a trader places a limit order she is requesting to be filled at her price or better; therefore, a worse fill is not feasible. For instance, an order to buy July

Soybeans at $8.45 on a limit might be filled at the stated price or lower; a fill at a price above $8.45 isn’t acceptable. Once again, positive slippage isn’t something that you should expect to see often.

Working Order = A working order is any order, other than a market order, that has been placed but not yet filled. A day order will be working until it is either filled or canceled, or it expires at the end of the trading session. It is possible for a GTC (Good Until Canceled) order to be working for several days, weeks, or months before being filled or canceled, or it expires with the contract.

Going Unable = If a floor broker is unable to fill an order, it is said to have gone unable. In other words, the order placed was not filled and is no longer working.

Handle = Many brokers and traders refer to a full point of price movement as a handle. The definition of a handle is different in each market but is typically identifiable as the largest manageable increment of price movement. Keep in mind that just as is the case with any slang, there are various interpretations of the meaning and uses.  Nonetheless, you likely can decipher the user’s meaning based on the context.

Full Handle = When it comes to the grains and energies, a full handle is a dollar in price.  Thus, if corn rallies from $4.00 per bushel to $5.00 per bushel, it is said to have moved a full handle. S&P traders most often refer to every 100 points in price change as a handle. As a result, the difference between 900 and 1,000 is a handle. You can figure the remaining contracts out from here; if not you will find comfort in knowing that when using slang, there is room for error.

Overbought/Oversold = Overbought and oversold are terms that describe a market that is believed to have moved “too far, too fast.” In the case of overbought market conditions, prices are deemed to have rallied sharply to what are believed to be unsustainable levels. Conversely, in an oversold market, prices are said to have dropped beyond realistic valuations. In either case, the market is often expected to digest the condition with a corrective, countertrend move, but that isn’t always the case.
Overbought and oversold market conditions are normally identified by technical indicators such as computer-generated oscillators. Technical traders might look to sell markets that are technically overbought and buy those that are oversold.

Debit/Account Debit
= Contrary to what you may have learned in Accounting 101, debit implies a negative balance. If a client is said to have gone debit or have a debit balance, it simply means that he has lost more money than was on deposit in his trading account. For instance, if a trader starts with $10,000 and fails to properly manage risk, it might be possible for losses to exceed the original investment and result in a negative account balance of $1,000, $2,000, or more.  Keep in mind that brokers and brokerage firms will do all that they can to prevent this from occurring because it poses a risk to their clearing relationships and their bottom lines in the event of a trader who cannot bring the account whole. Clearly, legal consequences for the trader will follow, but in the meantime it can be a large inconvenience for brokerage firms.

Round Turn = All transactions in commodity futures or options are referred to in terms of round turns, which is a simplified way of describing the practice of getting in and getting out of a trade. For instance, if a trader buys a futures contract and later sells one of the same commodity and month, he is said to have completed one round turn. If multiple lots are traded, the trader has completed the number of round turns according to the number of contracts. Therefore, if a trader buys 20 contracts of the December e-mini S&P and then sells 20 back, he is said to have done 20 round turns.

Brokerage firms often quote commission rates on a round-turn basis. It is important that you realize this before you begin shopping around for a broker.  If you are quoted $35 for a full-service brokerage account, be sure to confirm that this is a round-turn rate that covers the cost to enter and exit the trade. If not, you might be unknowingly agreeing to a per-side charge of $35 in which you will pay $35 to enter and $35 to offset a position. Those that are charging commission in this manner are said to be working on a per-side basis.

Trading Environment = Many firms have attempted to spice up their services through the use of new and exciting terms; trading environment is one of them. This expression is used synonymously with trading platform.