Single-Stock Futures Terms

Here you can review a short list of those items you're most likely to encounter when reading about the subject.

Definitions are not intended to suggest the correct legal significance or exact meaning. They were collected from several sources to help in your understanding of the futures and options industry.

A

Alpha Capture
What we call "company-specific trading" in our tutorials. Alpha refers to that part of a stock's risk and return that is attributable to the stock individually, as apposed to the overall market. Alpha capture is a spread trade between a stock future and a stock index future.

B

Basis
The difference between the current cash price and the futures price of the same commodity. The basis is determined by the costs of actually holding the commodity versus contracting to buy it for a later delivery (i.e., a futures contract). The basis is affected by other influences as well, such as unusual situations in supply or demand. Unless otherwise specified, the price of the nearby futures contract month is generally used to calculate the basis. (See Carrying Charge)

C

Carrying Charge (Cost To Carry)
For physical commodities such as grains and metals, the cost of storage space, insurance, and finance charges incurred by holding a physical commodity. In interest rate futures markets, it refers to the differential between the yield on a cash instrument and the cost necessary to buy the instrument. (See basis)

Cash Price
The price of the actual underlying commodity that a futures contracts is based upon. In the case of SSF, the price of the underlying stock.

Cross-Margining
A procedure for margining related securities, options, and futures contracts jointly when different clearing houses clear each side of the position.

D

Day Trade
The purchase and sale of a futures or an options contract in the same day, thus ending the day with no established position in the market or being flat.

Day Traders
Speculators who take positions in futures or options contracts and liquidate them prior to the close of the same trading day.

Derivative
A type of investment whose value depends on the value of other investments, indices or assets. Futures contracts and stock options are common types of derivatives.

F

Futures
A term used to designate all contracts covering the purchase and sale of financial instruments or physical commodities for future delivery on a commodity futures exchange. (See lesson, "What Is a Futures Contract?")

Futures Contract
A legally binding agreement, made on the trading floor of a futures exchange, to buy or sell a commodity or financial instrument sometime in the future. Futures contracts are standardized according to the quality, quantity, and delivery time and location. (See lesson, "What Is a Futures Contract?")

H

Hedge
The purchase or sale of a futures contract as a temporary substitute for a cash market transaction to be made at a later date. Usually it involves opposite positions in the cash market and futures market at the same time.

I

Initial Margin
The minimum value on deposit in your account to establish a new futures or options position, or to add to an existing position. Initial margin amount levels differ by contract. Lind-Waldock sets the level of Initial Margin required, and it may change at any time at Lind-Waldock's discretion. Increases or decreases in Initial Margin levels reflect anticipated or actual changes in market volatility. Also called "Initial Performance bond." (See lessons, "What is Margin in Futures Trading" and "Initial Margin and Maintenance Margin")

L

Leverage
The ability to control large dollar amounts of a commodity with a comparatively small amount of capital.

M

Maintenance Margin
The minimum value that you must keep in your account in order to continue to hold a position. The Maintenance Margin is typically less than the Initial Margin, and also differs by contract. If your account falls below the Maintenance Margin requirement, you will receive a margin call. If you wish to continue to hold the position, you will be required to restore your account to the full Initial Margin level (not to the Maintenance Margin level). Also known as the Maintenance Performance bond. (See lessons, "What is Margin in Futures Trading" and "Initial Margin and Maintenance Margin")

Margin
See Performance bond.

Margin Call
A demand from a clearinghouse to a clearing member, or from a brokerage firm to a customer, to bring margin deposits up to a minimum level required to support the positions held. This can be done by either depositing more funds or offsetting some or all of the positions held. (See lessons, "Initial Margin and Maintenance Margin" and "Futures Trading Account Value")

N

Narrow-based Index Futures
Also called industry-sector futures and exchange-traded baskets. Like a stock index future, except targeted to a specific group of stocks, such as the auto, airline or telecom industries.

P

Pair Trading
Another term for Spread Trading but more specifically to securities (stocks in particular) rather than commodities. Commonly refers to buying one stock and selling another related stock against it. An example would be spreading Coke SSF against Pepsi SSF. See also Spread Trade.

Performance bond (Margin)
Funds that must be deposited as a performance bond by a customer with his or her broker, by a broker with a clearing member, or by a clearing member, with the Clearing House. The performance bond helps to ensure the financial integrity of brokers, clearing members and the Exchange as a whole. (See lessons, "What is Margin in Futures Trading" and "Initial Margin and Maintenance Margin")

Physical Delivery
The transfer of the underlying commodity from the seller of a futures contract to the buyer of a futures contract. Each futures exchange has specific procedures for delivery of a physical commodity. Some futures contracts, such as stock index contracts, are cash settled.

Position Trader
An approach to trading, in which the trader either buys or sells, contracts and holds them for an extended period of time.

S

Single-Stock Futures (SSF)
SSF are an agreement between two parties that commits one party to buy a stock and one party to sell a stock at a given price and on a specified date. They are similar to existing futures contracts for gold, crude oil, bonds, and stock indices. Unlike actual stock, there is no ownership or voting rights contained in a SSF. (See also Universal Stock Futures)

Spread Trade
The simultaneous buying and selling of two related markets in the expectation that a profit will be made when the position is offset. Examples include: buying one futures contract and selling another futures contract of the same commodity but different delivery month; buying and selling the same delivery month of the same commodity on different futures exchanges; buying a given delivery month of one futures market and selling the same delivery month of a different, but related, futures market.

Stock Index
An indicator used to measure and report value changes in a selected group of stocks. How a particular stock index tracks the market depends on its composition the sampling of stocks, the weighting of individual stocks, and the method of averaging used to establish an index.

Stock Index Futures
Futures contracts on a stock index, such as the Standard & Poor's 500 or the Dow Jones Industrial Average. Stock index futures contracts are a derivative of the underlying index, and are cash-settled.

Systemic Risk
Market risk due to price fluctuations which cannot be eliminated by diversification.

U

Universal Stock Futures
Same as Single-Stock Futures, but used to refer to those contracts that trade on the LIFFE. See also, Single-Stock Futures.