DTN’s Six Factors Glossary

Strategies Glossary

Adjusted World Price (AWP):
The AWP is the weekly average (Friday through Thursday) of U.S. cotton quotes as well as the five cheapest quotes in landed European ports, which means the cotton has been unloaded at the port. The AWP is used as the Commodity Credit Corporation (CCC) loan repayment rate in some circumstances.

AWP/Future Spread:
This is the difference between the current futures price and the weekly fixed AWP rate when the AWP is the loan repayment rate. The difference must be big enough to pay loan charges and pay the farmer a premium.

Backwardation:
An inverted market, in grain-market terminology, where the nearby contract is priced higher than the first deferred contract. A backwardation that is getting larger (wider) indicates commercials are becoming more bullish, while a smaller (narrower) backwardation shows commercials are becoming more neutral or slightly bullish. For example a backwardation would exist if the May unleaded gasoline contract’s price is $2.90, the June contract’s price is $2.85 and the July contract’s price is $2.80. See also “Inverted Market.”

Basis:
The difference between the cash, or spot, price of a commodity and the price of the nearest futures contract for the same or a related commodity (i.e. cash price minus the futures price equals basis). Basis is usually computed in relation to the futures contract next to expire and may reflect different time periods, product forms, qualities or locations.

Bearish:
The expectation is for the futures price to fall.

British Thermal Unit (BTU):
The amount of heat required to raise the temperature of one pound of water by one degree Fahrenheit.

Bullish:
The expectation is for the futures price to rise.

Buy Back:
Closing out a short hedge by buying the previously sold futures contract, usually to coincide with a cash sale.

Call Option: 
A contract that gives the buyer the right, but not the obligation, to establish a long futures position at a specified price (strike price) by exercising the contract. The buyer pays a premium for this right, and this premium is the maximum loss that could be achieved until the decision to exercise into a futures contract is made. By purchasing the call option contract, the buyer protects from a price increase as the contract will appreciate in value as the underlying futures market price increases. If the price falls, the call owner simply allows his call to expire unexercised and takes the higher cash price. In that sense, a call offers protection against price moves in either direction, at the price of the non-refundable premium. See also “Option” and “Options Premium.”

Carry: 
The price structure of a particular market when subsequent contracts trade at a progressively higher level (i.e., the first deferred contract is priced higher than the nearby contract). The carry is influenced primarily by supply-and-demand conditions and is indicative of a market that is offering an incentive to someone (producers or commercial elevators) to hold grain for future use or sale. For example: December corn is priced at $5.95, March corn is priced at $6.15, May corn is priced at $6.25 and so on.

Carrying Charges: 
Cost of storing a physical commodity over a period of time, including insurance, storage and interest on the invested funds as well as other incidental costs. It is a carrying charge market when there are higher futures prices for each successive contract month. If the carrying charge is large enough to cover the costs, it is called a “full carry.” See also “Carry.”

Cash Market: 
A market that allows a seller to make delivery of his goods or services and receive that day’s price. See also “Cash Sale” and “Forward Cash Contract.”

Cash Sale: 
A price negotiation made on the day of delivery. See also “Cash Market” and “Forward Cash Contract.”

Commercial: 
An entity involved in the production, processing or merchandising of a commodity and has an underlying cash position that it is using the futures market to hedge against.

Commodity Futures Trading Commission (CFTC): 
The group that monitors positions of the various market traders.

Contango: 
The structure of a futures market, called a carry in grain-market terminology, when subsequent contracts trade at a progressively higher level (i.e., the first deferred contract is priced higher than the nearby contract). A contango that is getting smaller (narrower) indicates commercials are becoming more bullish, while one that is getting wider indicates commercials are becoming more neutral or bearish. For example a contango would exist if the March unleaded gasoline contract’s price is $2.80, the April contract’s price is $2.90 and the May contract’s price is $3.00. See also “Carry.”

Dead Cat Bounce: 
A brief recovery from an extended decline, or bear market, before the market falls again.

Deferred Contracts: 
Futures contracts for months beyond the nearby, or spot, month. See also “Nearby Contracts.”

Deliveries: 
Futures contracts that are held into the delivery period are subject to delivery. This means that those holding long positions will be required to take delivery of actual cash grain in one of the designated delivery locations, while those holding short futures positions will be required to deliver grain to a designated delivery location.

Equity: 
The difference between the market value and loan value of cotton in the Commodity Credit Corporation (CCC) loan. The equity must exceed the loan value for the farmer to sell the cotton.

Forward Cash Contract: 
A cash market transaction in which a seller agrees to deliver a specific cash commodity to a buyer at some point in the future. It differs from a futures contract in that the contract size, product specifications and delivery date are set between the buyer and seller, not standardized by the exchange on which they’re traded, and the price, too, is set by negotiation between the individual buyer and individual seller.

Futures Contract: 
A term used to designate all standardized contracts for the purchase and sale of financial instruments or physical commodities for future delivery on a commodity futures exchange.

Fundamentals: 
Market variables directly tied to supply and demand. This includes weather, export demand, production, beginning stocks, etc. Fundamental analysts contend that it is changes in these variables that create market action. In a cause and effect scenario, this would be the cause.

Hedge: 
To take an opposite position in the futures market to one held in the cash market. In doing so one “locks in” the price a buyer will pay or a seller will receive for a physical commodity since price chances on the quantity hedged thereafter will be offset by the opposite positions. For sellers, lost revenue from lower prices after the hedge is established will be offset by gains in futures. Should prices increase after the hedge is established, gains in the value of the physical commodity offset the negative impact of having sold futures. The opposite applies to buyers when they have offsetting positions.

Hedge-to-Arrive Contract: 
A cash contract, but unlike the forward contract, not all the components of the forward cash price are locked in. Instead the deferred futures price is set while the basis is left open, to be set before delivery.

Index Funds: 
Large speculative funds that invest in commodities on the long (buy) side; also called noncommercial traders.

Intermediate-Term Trend: 
Generally viewed as a retracement against the long-term trend. While the timeframe can differ among analysts, in general the intermediate-term trend (a.k.a. secondary) spans a few weeks to possibly six months.

In-the-Money Calls: 
See “At-the-Money Calls.”

Inverted Market: 
A situation in which the nearby, or spot, contract is higher priced than contracts further out (deferred contracts); also called an “inverse.” This situation is the opposite of a carry. See also “Backwardation.”

Island-Top: 
An island-top is a technical (chart) formation that often signals a bearish change in trend. This formation is established when the market gaps higher (leaves a price area between the previous high and the new low where no trade occurs), then after a variable time frame, leaves a gap down. This activity creates what looks like an island on the charts with a price bar surrounded on either side by price gaps.

Long: 
Holding or purchasing futures contracts to establish a market position that has not yet been liquidated through an offsetting sale; the opposite of short.

Long-liquidation: 
This activity is usually associated with noncommercial (speculative) traders and refers to the selling of previously purchased (long) futures positions.

Margin Risk: 
The possibility faced by a buyer or seller of a futures contract that the broker will demand more collateral. This will happen when the futures position is showing a loss (for a buyer, the price is falling; for the seller, the price is rising) and it won’t matter to the broker that the buyer or seller is a hedger, who will get back in the cash market whatever he loses in the futures market; the broker will still demand the assurance of more cash.

Market Types: 
Market Types are a general assessment of market conditions, based on a weighing of all six factors. The types are numbered one to five, one being Bullish, two is Somewhat Bullish, three is Neutral, four is Somewhat Bearish and five is Bearish. Market types are not strategy recommendations, but play a part in the recommendations offered.

Minimum Price Contract: 
A cash forward contract with a buyer of the commodity that works like an option. See also “Option.”

Noncommercial: 
A trader participating in the futures market who does not have a long or short position in the underlying cash market and is not involved in the production, processing or merchandising of a commodity; someone who is essentially betting on a price rise or fall, also called a “speculator.”

Nearby Contracts: 
The futures contract closest in time. For example, if it’s February the “nearby” contract for unleaded gas would be the March, while the April and subsequent months’ contracts would be deferred contracts. See also “Deferred Contracts.”

New-Crop: 
Refers to the next crop cycle.

Old-Crop: 
Refers to the current crop cycle.

Open Interest: 
The total number of futures or options on futures contracts that have not yet been offset or fulfilled by delivery.

Option: 
A contract giving the holder the right, but not the obligation, (hence, “option”) to buy (call option) or sell (put option) a futures contract in a given commodity at a specified price at any time between the purchase date and the expiration of the option contract. One way in which options differ from futures is that a premium is paid for options but not for futures. In return, options provide two-way protection — the ability to profit from either a rise or fall in the futures contract price — whereas futures contracts merely set a floor price (for a seller) or ceiling price (for a buyer). See also “Options Premium.”

Options Premium: 
The price agreed upon between the purchaser and seller for the purchase or sale of a put or call option, which is non-returnable; purchasers pay the premium and sellers (writers) receive the premium.

Out-of-the Money Calls: 
See “At-the-Money Calls.”

Packer Basis: 
The basis offered by a packer buyer on forward purchases of hogs from a producer. It’s set for a specific time in the future at a set level and is usually independent of whatever happens to actual basis levels. See also “Basis.”

Price Probability: 
Based on historical comparison, this is the way a price is most likely to move, typically expressed in terms of the percentage of time the price has historically been higher or lower than it is now. For example, unleaded gasoline has only traded higher 3 percent of the time, so its price probability is “in the upper 3 percent.” Price Probability is one of DTN’s Six Factors; in Six Factor analysis a price probability in the upper 3 percent would be one factor in support of the thought that the price might fall, as it has (by historical standards) little room to rise.

Pricing: 
The selling of futures contracts or cash contracts by producers in anticipation of lower prices in a sustainable downtrend.

Put Option: 
A contract that gives the buyer the right, but not the obligation, to establish a short futures position at a specified price (strike price) by exercising the contract. The buyer pays a premium for this right, and this premium is the maximum loss that could be achieved until the decision to exercise into a futures contract is made. By purchasing the put option contract, the buyer protects from a price decrease as the contract will appreciate in value as the underlying futures market price decreases. If the price rises, the put owner simply allows his put to expire unexercised and takes the higher cash price. In that way, a put offers protection both ways, at the cost of the non-refundable premium. See also “Option” and “Options Premium.”

Quarterly Strip: 
The Chicago Mercantile Exchange offers Class III milk futures for all 12 months of the calendar year and 23 months into the future. Producers and some other market users will generally find it easier to establish coverage based upon a “quarterly strip,” which is a three-month average. For example, the Q4-2006 strip would be the average of the October, November and December 2006 Class III milk futures prices. If a producer planned on marketing 400,000 pounds of milk each in October, November and December; the 100 percent strip coverage would entail selling 2 futures contracts (200,000 lbs per contract) each in the October, November and December delivery months. If the prices were $10.75 for October, $11.00 for November and $11.25 for December; the average strip price would be $11.00 per cwt.

Relative Strength Index (RSI): 
A technical indicator that relates the size of recent gains to losses as an index number between 0 and 100. Threshold values of 70 and 30 are typically used to indicate that the contract is overbought or oversold, respectively.

Resistance: 
A price level the market has had difficulty moving above due to the placement of sell orders; it acts as a sort of overhead barrier to further price gains. A technical analyst will have a series of “resistance” points indicated on a chart and will assume that if the price breaks above resistance, it could easily be headed for further gains.

Reversal: 
A technical term suggesting positive price action after an attempt to trade lower or negative price action after an attempt to trade higher.

Scale-Up Selling: 
The selling of an additional portion of a crop either in the cash or futures markets as the market price rises in order to realize that price on that portion of production that is covered.

Seasonal Index: 
The tendency of a commodity price to rise or fall at a given time of year. For example, unleaded gasoline prices have a seasonal tendency to rise during the summer driving season when demand for gasoline normally rises. Seasonal factors are based on seasonal indices, compiled by comparing prices for the relevant time span over a period of years with prices at other times during the same years.

Selling Futures: T
o sell futures is to make a legally binding promise to sell a commodity at a given price and at a given time in the future. If the seller is hedging, he or she anticipates selling the physical commodity in the cash market for whatever price it fetches at the time, with that cash price offsetting the gain or loss on the futures contract to insure that today’s price is what he or she will receive.

Short: 
Having sold or selling futures contracts to establish a market position that has not yet been liquidated or offset through an offsetting sale; the opposite of long.

Short-Covering: 
Purchasing futures contracts to offset a short position. See also “Short.”

Spread: 
The price gap between different futures contracts.

Strip: 
See “Quarterly Strip.”

Support: 
A level where buying interest is sufficiently strong to overcome selling pressure.

Synthetic Call: 
A measurement of the fluctuation in the price movement of a commodity over a period of time. It is also a major component used in the theoretical valuation of an option price. A market position with benefits equivalent to those of a put: protection (for a seller of the underlying commodity) against price declines combined with the ability to take advantage of price increases. An example of a synthetic put would be a short futures position and owning a call.

Synthetic Put: 
A market position with benefits equivalent to those of a call: protection (for a buyer of the underlying commodity) against price increases combined with the ability to take advantage of price declines. An example of a synthetic call would be a long futures position and owning a put.

Technical: 
Determining price direction based typically on price action, trend lines and a variety of indicators. In a cause and effect scenario, this would be the effect.

Time Value: 
The portion of an option’s premium that exceeds the intrinsic value. The time value of an option reflects the probability that the option will move into-the-money; therefore, the longer the time remaining until expiration of the option, the greater its time value. See also “Options” and “Options Premium.”

Trading Range: 
The difference between the high and low price of a commodity during a given period.

Trend: 
The general direction of the market.

Volatility: 
A measurement of the fluctuation in the price movement of a commodity over a period of time. It is also a major component used in the theoretical valuation of an option price. One of Six Factors