Professional Trader Level II - Trading Systems

Futures Market: A market that focuses on the buying and selling of futures contracts. These markets are also called futures exchanges. Hedging: The practice of transferring price risk associated with the cash market by simultaneously holding an offsetting position in the futures market.

Hedging Costs: The transaction costs associated with being involved in the futures market as a result of hedging or trading options. These generally include broker’s commissions and the interest cost associated with having money deposited in your margin account.

Hedging costs vary depending on commissions, interest rates, and the period of time you maintain a futures or option position. Generally, hedging costs are about 0.25 to 0.50 cents per pound for livestock and 1.00 to 4.00 cents per bushel for grains.

Holder: The buyer (or owner) of a commodity option. The holder has the right (but not the obligation) to enter into a specified futures position at a stated (strike) price.

In-the-Money: A commodity option that has value if exercised immediately. A put is in-the-money if its strike price is above the current market price of the underlying futures contract (the right to sell “high”). A call is in-the-money if its strike price is below the current market price of the underlying futures contract (the right to buy “low”).

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