Glossary

Access Session
After-hours trading of computer-matched trades in the NYMEX energy markets.
American Option
Can be exercised at any time during the life of the option.
Arbitrage
The act of buying something at a low price in one market and simultaneously selling it for a higher price in another.
Asian Option
Also called an average priced option (“APO”), is based on the relationship between a strike price and the average daily spot prices over a specified period of time. If at expiration, the strike price of the option is higher than the accumulated average of spot prices, the option will have exercise value.
At-the-Money
When the underlying futures price equals the strike price of the Derivative strike price.
Back Months
Futures contracts with delivery dates in the more distant future.
Backwardation
A market condition in which futures prices are progressively lower in the forward delivery months than in the closer delivery months. Typically, an indication of inadequate or tight supply in the market.
Basis
The differential that exists between the futures price for a given commodity and cash, or spot price for the same or similar commodity. Basis differentials can be attributed to grade, location, or supply/demand imbalances.
Bear Market
An extended period of generally falling prices in a specific commodity or group of commodities.
Bear Market Insurance
An OTC option strategy implemented by a consumer, or producer, of a specific commodity by buying a put option. The holder of the put option benefits when the price of the underlying commodity moves below the strike price of the option. Also associated with the holder of a fixed price or collar contract, under which the consumer, or end-user, would not otherwise participate in lower prices below a certain strike price.
Bid/Ask
A measure of market liquidity. The bid is the price level at which buyers are willing to acquire the contract from sellers. The ask (offer) is the price level at which sellers offer to sell the contract to buyers. When a trader buys at the ask, or offer, price, he “lifts” the offer. When he sells at the bid price, he “hits” the bid.
Broker
The Derivative agent who introduces counterparties to a transaction, arranges the transaction, and charges a fee for his service usually based on the volume of the transaction. A broker never takes the principal position in the market.
Bull Market
An extended period of generally rising prices in a specific commodity or group of commodities.
Bull Market Insurance (BMI)
An OTC option strategy implemented by a producer, or holder, of a specific commodity by buying a call option. The holder of the call option benefits when the price of the underlying commodity moves above the strike price of the option. Usually associated with the holder of a fixed price or collar contract, under which the producer would not otherwise participate in higher prices above a certain strike price.
Bullet Option
Also called a European option, is an option that can only be exercised at maturity.
Call
An option contract that gives the holder the right, but not the obligation, to buy a specific commodity or asset from the writer, or seller, for a specific volume, at a specific price, at or before a specified maturity date.
Cap
An option strategy implemented by buying or selling a call for a specific commodity a long call benefits from falling prices when the price of the underlying commodity rises above the strike price of the call. Typically implemented by an end-user or consumer of an underlying commodity to hedge upside price risk. Also can be sold to finance a long put in a collar for a producer.
CFTC
The Commodity Futures Trading Commission, is the U.S. Federal regulatory body that oversees commodity futures and options trading activities, standards and practices on U.S. Exchanges.
Clearing Member
Clearing members of an exchange accept responsibility for all trades cleared though them, and share secondary responsibility for the liquidity of the exchange’s clearing operation. They earn commissions for clearing their customers’ trades, and enjoy special margin privileges. Original margin requirements for clearing members are lower than for customers, and clearing members may use letters-of-credit posted with the clearinghouse as original margin for customer accounts as well as for their own trades. Clearing members must meet a minimum capital requirement.
Clearinghouse
The organization that registers, monitors, matches and guarantees trades on an exchange-traded futures and options market, and performs financial settlement of futures and options transactions.
Close
The closing period at the end of a trading session.
Collar
An option strategy designed to minimize or eliminate the upfront premium cost of a floor or a cap, through the sale of a call or put, respectively, depending on whether the client is a producer or end-user. A producer may eliminate the total premium cost on a floor, for downside price risk protection, through the sale of a call option at a strike price such that the proceeds from the sale of the call option fully offsets the cost of the floor (No-Cost Collar). Once implemented, the holder of the collar will participate in a specified range of prices for the underlying commodity.
Collateral
An obligation, security, cash or asset provided in conjunction with a Derivative contract obligation, in order to secure its performance.
Confirmation
A document that defines a Derivatives contract that a dealer or marketer has just entered into with a customer. The confirmation comes after the oral agreement ordinarily over the telephone which the dealer or marketer ordinarily records and saves.
Contango
A market condition in which prices are progressively higher in the forward delivery months than in the closer delivery months. Typically an indication of adequate or excess supply in the market.
Credit Risk
The risk in a financial transaction where there is exposure to receiving cash flows from the counterparty.
Dealer
A Derivatives principal, also referred to as an intermediary or issuer, which buys and sells OTC instruments that it owns for its own account.
Derivative Instrument
A financial product, the value of which is determined directly or indirectly by the value of an underlying commodity. Derivatives are tradable financial contracts, which include futures, options, swaps and forwards.
Efficiency
Refers to a competitive market with may buyers and sellers in which resources are allocated optimally and prices are set at market cost.
EFP
Exchange of Futures for Physicals, is a futures contract provision involving the delivery of physical product from one market participant to another in the cash market, and a concomitant assumption of equal and opposite futures positions by the same participants. In this transaction, the futures commitments of the parties will be matched and cleared by the Clearinghouse (Clearing Broker). a futures contract provision involving the exchange of an OTC swap between one market participant to another, and a concomitant assumption of equal and opposite futures positions by the same participants. In this transaction, the futures commitments of the parties will be matched and cleared by the Clearinghouse (Clearing Broker).
EFS
Exchange of Futures for Swaps
European Option
Or Bullet Option, can be exercised only at the maturity of the option.
Exercise
The right granted to the option holder to buy (call) or sell (put) the underlying commodity.
Exercise Price
Also known as the strike price, is the price that must be paid by an option holder to buy or sell the underlying commodity from the option writer.
Expiration Date
The date after which a Derivative is void (“Expiry Date”).
Fixed Price
An OTC Derivative structure, also know as a “fixed-for-float-swap”, in which a producer or end user exchanges his floating market price for an underlying commodity for a fixed contract price, for a specific period of time. A fixed-price contract is tantamount to either buying (end-user) or selling (producer) the underlying commodity for a specific period of time, on a fixed and flat price basis.
Floor
An option strategy implemented by buying or selling a put for a specific commodity- a long put benefits from falling prices when the price of the underlying commodity falls below the strike price of the put. Typically implemented by a producer or holder of an underlying commodity to hedge downside price risk. Also can be sold to finance a long call in a collar for an end-user.
Floor Broker
A “local” who trades for customer accounts, on commission.
Floor Trader
A “local” who trades for his own account for profit.
Forward Contract
A contract to exchange (buy or sell) an underlying commodity for a fixed forward price at a specific, future delivery date.
Front Months
Futures contracts with delivery dates in the nearer future.
Futures
Standardized contracts for the future purchase or sale of a specific commodity as a specific location, at a specific grade or quality, at a specific time, under the provisions of Exchange and Federal Government regulations.
Hedge
The initiation of reasonably equal and opposite positions in the physical and/or futures, options or OTC Derivative markets, as a form of protection against adverse price movements. By matching instruments or physical commitments, those prices will likely move inversely under a common market scenario, the exposure to price risk is either mitigated or reduced.
Historical Volatility
The degree to which the historical price of a commodity fluctuates around some mean value. It is usually measured by the variance, or standard deviation, of price change.
Implied Volatility
The degree to which the historical and expected prices of a commodity fluctuate around some mean value. Implied Volatility is calculated by inserting he currently-traded option premium into an option pricing model (e.g., Black-Scholes), and solving backwards for the standard deviation.
Index
The commodity price at a physical location, as published by an independent, accepted source, such as Platt’s Inside FERC Gas Market Report for natural gas.
In-the-Money
When the underlying futures price exceeds the strike price of the Derivative instrument (e.g., higher than a long call option’s strike price, or lower than a long put option’s strike price).
Knockout Option
An option that “dies” when a trigger event occurs. Typically, when a price crosses a particular barrier, it triggers the option.
Last Trading Day
The final trading day for a particular delivery month futures contract or option contract. Any futures contracts left open following this session must be settled by delivery.
Liquid Market
Refers to an Efficient market for financial instruments in which buying and selling can be performed with ease, due to the presence of a large number of buyers and sellers prepared to trade substantial quantities at small price differences.
Long
The condition of owning a commodity from which the owner benefits from rising prices.
Margin
Money deposited by traders of futures or OTC Derivatives contracts as a guarantee of fulfillment of contract obligations. Initial margin is posted when a contract is initiated. Variation margin is paid (or collected) in order to maintain a minimum margin level based on daily fluctuations in contract market value.
Market Maker
Also know as an intermediary, dealer and issuer the entity that makes a market in OTC instruments by offering to both buy and sell the instrument. A Market Maker buys or sells from its own inventory against orders from commercial and institutional companies and from other dealers.
Mark-to-Market
The daily adjustment of open positions to reflect unrealized profits and losses resulting from price movements occurring during the last trading session. This periodic revaluation values all positions in a hedge portfolio at current market prices.
Master Swap Agreement
A contract between two Derivatives counterparties that specifies all definitions, terms, conditions and laws governing any swap transaction. It enables the parties to execute one agreement and transact multiple swaps though appendices to that agreement, if necessary, rather than executing multiple agreements for multiple transactions.
Mean Reversion
The tendency of a quantity (price) to evolve toward a long-term average.
Notional
The value or volume of the underlying commodity of an OTC transaction.
NYMEX
Acronym for New York Mercantile Exchange.
Open
The period at the beginning of a trading session. The opening price is the volumetrically-weighted price for a given futures commodity that is generated by trading throughout open outcry during the opening range of trading on a commodity exchange.
Open Interest
The cumulative number of futures contracts (exchange traded futures and/or options contracts) that have been purchased and not yet been offset by opposite futures or option transactions, or fulfilled by delivery (exercise).
Open Outcry
In the context of futures, an auction system used in the trading pits of the floors exchanges. All such bids and offers are made openly by outcry and hand signals.
Option
The right, but not the obligation, to buy or sell a commodity at a given price (strike price) at or before a specified time.
Out-of-the-Money
When the strike price of the Derivative exceeds the underlying futures price (e.g., lover than a long call option’s strike price, or higher than a long put option’s strike price).
Over-the-Counter (OTC)
Relates to the purchase and sale of financial instruments not conducted in a registered exchange (e.g., NYMEX).
Participation
An OTC option strategy where a producer or end-user only partially finances the purchase of a put (floor) or call (cap) with the sale of a call or put, respectively. In the case of a producer, the cost of the purchase of a floor would be partially offset by the proceeds from the sale of a call (e.g. 50%). If the price of the underlying commodity moves through the strike price of the cap, the producer would partially (e.g., 50%) “participate” in the higher prices for the underlying commodity in a rising market; as opposed to a No-Cost Collar, in which the producer would not “participate” in the rising prices for the underlying commodity.
Position
The price or volatility exposure of a company’s holdings. The holdings may be an inventory of physical assets, forward contracts, OTC swaps or options, or exchanged exchange- traded futures and options. A long position benefits from rising prices; a short position benefits from falling prices. A fully-hedged position is price neutral.
Premium
The price paid for an option or instrument with option-like features.
Present Value
The current value of a given future cash flow stream, discounted at a given interest rate.
Put
A contract that gives the holder the right, but not the obligation, to sell a specific commodity to the writer of the option for a specified price, at or before a specific date.
Resistance
A “ceiling” above the market which exists if prices are not expected to, or have failed to, rise above a certain level.
Settle
The process of closing a futures contract for the day, not necessarily at the very last price traded, often at a volumetrically-weighted average of the prices for the exchange of contracts in the closing range (although the rules vary with different exchanges).
Settlement
The price established by the Exchange Settlement Committee at the close of each trading session, as the official price to be used by the clearinghouse in determining net gains or losses, margin requirements, and the nest day’s price limits. Derived by calculating the weighted-average of prices during that period.
Short
The condition of owing, or having sold a commodity without owning the equivalent volume of the underlying commodity from which the seller benefits from falling prices.
Speculator
An investor willing to take on high risk, who hopes to profit from the specific directional price movement of a futures contract, options contract, or inventory. For example, if a speculator believed that the price of a commodity would increase, eh would buy (go long) the commodity. Likewise, if a producer believes the price of his production will increase, he will not hedge against downward price movement.
Standard Deviation
A statistical term which tells how far a typical member of a sample or population is from the mean value (the sum of all observations in a sample or population, divided by the number of observations) of that sample or population. A large standard deviation suggests that a typical member is far away from the mean. Conversely, a small standard deviation suggests that members are clustered closely around the mean.
Swap
A contractual agreement providing for a series of exchange of payments in the same or different energy commodities
The Greeks
A set of factor sensitivities used extensively by traders to quantify the exposures of portfolios that contain options. Each measures how the portfolio’s market value should respond to a change in some variable price of the underlying commodity, implied volatility, interest rate, or time. There are five “Greeks”: delta, gamma, vega, theta and rho. Four of the five are risk metrics, except for theta, which measures the first order (linear) sensitivity to the passage of time. The passage of time is certain; thus, it entails no risk.
Time Value
Part of an option premium which reflects the excess over the intrinsic value, or the entire premium if there is no intrinsic value. At given price levels, the option time value will decline until expiration. It is this decrease in time value that makes options a wasting asset.
Trading Floor
Relates to the physical location where futures and options are traded. In a registered exchange, the trading floor is comprised of individual rings, or pits, for each designated contract market.
Trend
Price activity which perpetuates in a particular direction, and is characterized by higher highs and higher lows or, conversely, lower highs and lower lows.
Trigger Pricing
A pricing mechanism whereby either party may “trigger” the underlying commodity price off of an exchange-traded price.
Volatility
The degree to which the rate of change of price of a commodity fluctuates around a mean value. It is usually measured by the variance or standard deviation of price changes, on an annualized basis.