Professional Equities Trader Passport Program

Initial Margin: The initial deposit (generally quoted per contract) necessary to open a long or short futures position. See Margin. Intrinsic Value: The value of a commodity option if immediately exercised.

Intrinsic value for an in-the-money put is equal to the strike price minus the current market price of the underlying futures contract. Intrinsic value for an inthe- money call is equal to the current market price of the underlying futures contract minus the strike price.

At-themoney and out-of-the-money options have no intrinsic value.

Strike Price: The price at which the holder of a commodity option has the right to enter into the specified futures position should the holder choose to exercise it (also called the exercise price or striking price). The holder of a put has the right to a short futures position (a sell) at the strike price. The holder of a call has the right to a long futures position (a buy) at the strike price.

Time Value: The amount buyers are willing to pay for an option in anticipation of a change in the price of the underlying futures contract over time will bring about an increase in the option’s value (sometimes called extrinsic value). The premium (which represents the option’s market value) is composed of time value and intrinsic value. Thus, the amount by which the premium exceeds the option’s intrinsic value measures the time value. For at-themoney and out-of-the-money options (which have no intrinsic value), the entire premium is made up of time value.

Trading Pit: An area of the exchange’s trading floor where the actual trading of a specific futures contract or option takes place. Under: The term used to describe a basis with a negative value. Since basis is defined as the cash price minus the futures price, an under basis occurs when the cash price is below the futures price. For example, a fed cattle basis of 1.5 under implies the cash price is 1.5 cents per pound less than the futures price. Underlying Futures Contract: The specific futures contract that a commodity option conveys the right to sell (for a put) or buy (for a call).

Weakening Basis: Occurs when the basis is getting smaller. Since basis can be a positive or negative number, a weakening basis means a smaller positive number or a larger negative number. Basis gets weaker whenever the cash price decreases relative to the futures price.

Writer: The seller of an option (also called the grantor). For a put, the writer has the obligation (not the right) to give the option holder a short position on the underlying futures contract at the strike price. For a call, the writer has the obligation (not the right) to give the option holder a long position on the underlying futures contract at the strike price.

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