Futures Market Jargons

Futures market jargons refer to the technical terms and phrases used in the futures trading industry. Understanding these jargons is important for any trader or investor who wants to participate in the futures market. Here are some of the most common futures market jargons:

Long and Short: In futures trading, a long position is when an investor buys a futures contract with the expectation that the price of the underlying asset will rise. A short position is when an investor sells a futures contract with the expectation that the price of the underlying asset will fall.

Margin: Margin refers to the amount of money that traders must deposit with their broker to cover any potential losses that may occur during trading. Margins are typically a percentage of the total value of the futures contract.

Contract Size: The contract size refers to the specific amount of the underlying asset that is being traded in a futures contract. For example, one futures contract on crude oil may represent 1,000 barrels of oil.

Settlement: Settlement refers to the process of closing out a futures contract by exchanging the underlying asset or cash. Settlement can occur through physical delivery or cash settlement, depending on the specific futures contract.

Tick Size: Tick size refers to the minimum price movement of a futures contract. For example, if the tick size for a gold futures contract is $0.10, then the price can move up or down by $0.10 increments.

Open Interest: Open interest refers to the total number of outstanding futures contracts that have not yet been closed or delivered. This metric is used to gauge the overall market sentiment for a particular futures contract.

Limit Up and Limit Down: Limit up and limit down refer to the maximum price movement allowed for a futures contract during a single trading session. When a futures contract hits its limit up or limit down level, trading may be halted for a certain period of time.

Contango and Backwardation: Contango refers to a situation where the futures price of a commodity is higher than the spot price. Backwardation refers to a situation where the futures price of a commodity is lower than the spot price. These terms are used to describe the relationship between the futures price and spot price of a commodity.

Delivery Month: The delivery month refers to the specific month in which a futures contract will be settled. For example, a futures contract for corn may have a delivery month of December.

Roll Over: Rolling over a futures contract refers to closing out an expiring contract and simultaneously opening a new contract for the same underlying asset with a later delivery date.

Basis: Basis refers to the difference between the cash price of the underlying asset and the futures price. A positive basis indicates that the futures price is higher than the cash price, while a negative basis indicates that the futures price is lower than the cash price.

Day Trading Margin: Day trading margin is the amount of margin required by traders who open and close positions on the same day. This margin is typically lower than the initial margin required for holding a position overnight.

Expiration Date: The expiration date is the date on which a futures contract will expire and must be settled. After this date, the contract is no longer tradable.

Gapping: Gapping refers to a situation where the price of a futures contract jumps from one level to another without any trades occurring in between. This can occur due to news events or market volatility.

Initial Margin: The initial margin is the amount of money that traders must deposit with their broker when opening a position in a futures contract. This margin is typically a percentage of the total value of the contract.

Mark-to-Market: Mark-to-market refers to the process of calculating the daily profit or loss on a futures position. This is done by adjusting the value of the position to reflect the current market price of the underlying asset.

Speculator: A speculator is a trader who buys or sells futures contracts with the goal of profiting from price movements in the market. Speculators do not have a direct interest in the underlying asset.

Stop Order: A stop order is an order to buy or sell a futures contract when the price reaches a certain level. Stop orders are used to limit losses or lock in profits.

Settlement Price: The settlement price is the final price at which a futures contract is settled. This price is typically based on the average price of the underlying asset over a specific period of time.

Volatility: Volatility refers to the degree of variation in the price of a futures contract over time. High volatility can lead to large price swings, while low volatility can indicate a relatively stable market.

Conclusion

Understanding futures market jargons is essential for anyone interested in trading futures contracts. These terms provide a framework for understanding the technical aspects of futures trading and can help traders make informed decisions about their trades.Understanding these futures market jargons can help traders and investors navigate the complexities of futures trading and make informed decisions about their trades.