Dairy Futures and Options Tutorial

Glossary of Terms



Also called "offer". Indicates a willingness to sell a futures contract at a given price.
At-the-Money Option
An option with strike price that is equal, or approximately equal, to the current market price of the underlying futures contract.


Difference between a particular futures price and cash price. Calculated as: Cash Price - Futures Price
One who believes prices will move lower.
Bear Market
A market in which prices are declining.
The price that the market participants are willing to pay.
A company or individual that executes futures and options orders on behalf of financial and commercial institutions and/or the general public.
One who expects prices to rise.
Bull Market
A market in which prices are rising.


Call Options
Provides owners the right, but not the obligation to buy futures contracts at predetermined price. For example, a November $12.00 Class III CALL option gives you, the buyer, the right to buy (be long) November Class III futures contract at $12.00/cwt even if November Class III futures are trading at $12.75/cwt.
  • Used to protect against rising prices
Cash Commodity
The actual physical commodity as distinguished from a futures commodity.
Cash Price
Transaction price for physical commodity at a particular time.
Cash Settle Contract
At expiration of a contract, any outstanding contracts to make or take delivery is settled against some agreed to published price series.
Contract Buyer
Agrees to receive (purchase) a specified quantity and quality of a particular commodity (except cash settle type of contract).
Contract Seller
Agrees to sell (deliver) a specified quantity and quality of a particular commodity (except cash settle type of contract).
  • Transfer of dollars
  • Actual delivery is not required
  • Examples: CME and NYBOT (CSCE) Class III contracts are cash settled against USDA announced Class III on the 5th of each month. CME and NYBOT (CSCE) cheese and NFDM contracts are also examples of contracts that are cash settled.
The amount of money you pay the brokerage firm to execute your order on the trading floor of the exchange.
An article of commerce or a product that can be used for commerce. In a narrow sense, products traded on an authorized commodity exchange. The types of commodities include agricultural products, metals, petroleum, foreign currencies, and financial instruments and index, to name a few.
Commodity Broker
Licensed agent through which non-members of commodity exchange buy and sell futures contracts.
Unit of trading for a financial or commodity future. Also, actual bilateral agreement between the parties (buyer and seller) of a futures or options on futures transaction as defined by an exchange.
Hedging a cash commodity using a different but related futures contract when there is no futures contract for the cash commodity being hedged and the cash and futures markets follow similar price trends (e.g., using soybean meal futures to hedge fish meal).


Daily Trading Limit
The maximum price range set by the exchange cash day for a contract.


Option holder asserts rights under particular options contract.
  • Call Holder: Assigned a long futures contract at strike price.
  • Put Holder: Assigned a short futures contract at strike price.
    • Only buyer has right to exercise option
Exercise Style
Two types (styles) of options: European and American
  • European Style Option can be exercised by the buyer only at expiration date but can be sold back (offset) on any day prior to expiration.
  • American Style Option can be exercised or sold back (offset) on any business day up to and including the expiration dates.
  • Mini-Class III futures contracts at the CME are European Style while Class III contracts at the CME are American Style
Expiration Date
The last day that an option may be exercised into the underlying futures contract. Also, the last day of trading for a futures contract.


Floor Broker
An exchange member who is paid a fee for executing orders for Clearing Members or their customers. A Floor Broker executing orders must be licensed by the CFTC.
Floor Trader
An exchange member who generally trades only for his/her own account or for an account controlled by him/her. Also referred to as a "local."
Forward (Cash) Contract
A cash contract in which a seller agrees to deliver a specific cash commodity to a buyer sometime in the future. Forward contracts, in contrast to futures contracts, are privately negotiated and are not standardized.
Futures Contract
A formal binding arrangement which is transacted on the trading floor of a commodity exchange [such as the Chicago Mercantile Exchange (CME) and the New York Board of Trade (Coffee, Sugar & Cocoa Exchange) (NYBOT (CSCE))].
Futures Exchange
A central marketplace with established rules and regulations where buyers and sellers meet to trade futures and options on futures contracts.
Futures Months
Delivery months for which the contract is traded
  • CME Class III and Cheddar cheese contracts traded for all 12 months
  • CME Butter contracts traded for Feb, Mar, May, Jul, Sept And Oct
Futures Price
Transaction price at which buyer and seller agree to terms and conditions of futures contract. Established through open bidding on commodity exchange.
  • Calculated via the following: Basis = Cash Price - Futures Price


Simultaneously take equal and offsetting positions (stances) in cash and futures markets.
  • Designed to reduce risk of unfavorable price movements between time hedge is placed and delivery of cash product made
  • Hedge can be lifted by:
    • Reversing original transaction (e.g., if bought originally, then sell a contract)
    • By fulfilling the obligations of the futures contract regarding delivery (very rarely done and cannot be cash settle type of contract)
    • Let contract expire and cash settle against price series (example in hedging section)
The highest price of the day for a particular futures contract.
One who purchases an option.


Initial Performance Bond
The funds required when a futures position (or a short options on futures position) is opened. (Previously referred to as Initial Margin)
An option with positive intrinsic value.
  • Call Option: Exercise price < current futures price
  • Put Option: Exercise price > current futures price
Intrinsic Value
Value of Strike versus Current Futures Price (if exercise).


Last Trading Day
The final day when trading may occur in a given futures or option contract month. Dairy futures contracts outstanding at the end of the last trading day are cash settled (in some cases by EFPs).
Limit Order
An order given to a broker by a customer that specifies a price; the order can be executed only if the market reaches or betters that price.
Any transaction that offsets or closes out a long or short futures position.
Long Hedge
The purchase of a futures contract in anticipation of an actual purchase in the cash market. Used by processors or exporters as protection against and advance in the cash price.
Long Position
  • Cash Market: Trader owns the commodity.
    • Canceled when commodity sold
  • Futures Market: Trader has purchased a futures contract.
    • Canceled by selling contract, taking delivery or cash settling (if applicable)


A set minimum margin (per outstanding futures contract) that a customer must maintain in his margin account.
Maintenance Performance Bond
A sum, usually smaller than but part of the initial performance bond, which must be maintained on deposit in the customer's account at all times. If a customer's equity in any futures position drops to, or under, the maintenance performance bond level, a "performance bond call" is issued for the amount of money required to restore the customer's equity in the account to the initial margin level.
Money representing a performance bond by trader placed and maintained with broker. 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.
Margin Call
Call from broker firm requiring deposit of funds into margin account. A demand for additional funds because of adverse price movement.
Market Order
An order to buy or sell a futures contract of a given delivery month to be filled at the best possible price and as soon as possible.
Maximum Price Fluctuation
The maximum amount the contract price can change, up or down, during one trading session, as stipulated by Exchange rules.
Minimum Price Fluctuation
Smallest increment of price movement possible in trading a given contract, often referred to as a "tick."


The nearest active trading month of a futures or options on futures contract. Also referred to as "lead month."
Nearby (delivery) Month
The futures contract month closest to expiration. Also referred to as spot month.


An expression indicating one's desire to sell a commodity at a given price; opposite of bid.
Selling if one has bought, or buying if one has sold, a futures or options on futures contract.
Open Interest
Total number of futures or options on futures contracts that have not yet been offset or fulfilled by delivery. An indicator of the depth or liquidity of a market (the ability to buy or sell at or near a given price) and of the use of a market for risk- and/or asset-management.
Open Order
An order to a broker that is good until it is canceled or executed.
Gives you the right, but not the obligation to buy or sell a specific futures contract at a specific price on or before a certain expiration date.
  • Allows you to take advantage of futures price moves without actually having a futures position and thereby having to deal with the uncertainty of potential margin calls
  • Two different types of options: PUTS and CALLS
  • For every buyer of an option there is a seller
  • PUTS and CALLS are separate options contracts (e.g., not the opposite side of the same transaction)
  • Buyer pays a premium to the seller for each contract
Option Buyer
You can choose to exercise your right via the purchase of an option and take a futures position.
  • If don't exercise your option, will likely sell it back to market if it has value
  • Could be a producer wanting to protect your milk price or manufacturer wanting to protect your milk purchase costs
  • For every option buyer there is an option seller
Option Seller (writer)
Obligated to take opposite futures position if the buyer exercises his right (long if the buyer exercises a put, short if the buyer exercises a call).
  • Most sellers are speculators
  • For every option seller there is an option buyer
  • Seller must post margin (performance bond) requirements given possible risk of having to take an adverse futures position
An option with no intrinsic value, i.e., a call whose strike price is above the current futures price or a put whose strike price is below the current futures price.


The area on the trading floor where futures and options on futures contracts are bought and sold. Pits are usually raised octagonal platforms with steps descending on the inside that permit buyers and sellers of contracts to see each other.
The cost of purchase an option.
  • Similar to an insurance premium
  • Determined by competitive auction similar to futures contracts
  • Premium is lost even if do not use option to purchase futures contract
  • Factors that determine premium are
  • Strike price level relative to current futures price level
  • Time remaining until expiration
  • Market volatility
Price Discovery
The generation of information about "future" cash market prices through the futures markets.
Price Limit
The maximum advance or decline from the previous day's settlement permitted for a contract in one trading session by the rules of the exchange.
Put Options
Provides owners the right, but not the obligation to sell futures contracts at predetermined price. For Example, a November $12.75 Class III PUT option gives you, the buyer, the right to sell (be short) a November Class III futures contract at $12.75/cwt even if the November Class III futures are trading at $12.00/cwt.
  • Used to protect against falling prices


An upward movement of prices following a decline; the opposite of a reaction.
The high and low prices or high and low bids and offers, recorded during a specified time.
A decline in prices following an advance. Also known as Correction. The opposite of rally.
Round Turn
The Completion of a "sell and buy back" or "buy and then sell" set of transactions.


Settle(ment) Price
Futures price recorded at the end of trading.
  • Price used to establish daily gains and losses, margin calls, etc.
Short Hedge
The sale of a futures contract in anticipation of a later cash market sale. Used to eliminate or lessen the possible decline in value of ownership of an approximately equal amount of the cash financial instrument or physical commodity.
Short Position
  • Cash Market: An example would be, forward selling commodity not yet produced.
    • Canceled by producing and making delivery
  • Futures Market: sells a futures contract.
    • Canceled by purchasing contract, making delivery or cash settling (if applicable)
Buy, sell, or hold on to cash commodities or buy or sell futures contracts to take advantage from favorable price change. You do not hedge using other market.
  • Assume price risk
  • Speculator in the futures market, does not have to deal in the cash market
  • Can be speculator in the cash market (cheese plant holding inventory of final product)
  • Speculating and Hedging are opposites
Usually refers to a cash market price for a physical commodity that is available for immediate delivery.
Stop-Limit Order
A variation of a stop order in which a trade must be executed at the exact price or better. If the order cannot be executed, it is held until the stated price or better is reached again.
Stop Order
An order to buy or sell when the market reaches a specified point. A stop order to buy becomes a market order when the futures contract trades (or is bid) at or above the stop price. A stop order to sell becomes a market order when the futures contract trades (or is offered) at or below the stop price.
Strike (Exercise) Price
Price at which you may buy or sell the underlying futures contract.
  • Exercising the option results in a futures position at the designated strike price
  • Strike prices are set around the existing futures prices
  • New strike prices are listed as futures contracts move higher or lower


Refers to a change in price, either up or down.
Time Limit Order
A customer order that designates the time during which it can be executed.
Time Value
The amount of money option buyer are willing to pay for an option in the anticipation that, over time, a change in the underlying futures price will cause the option to increase in value. In general, an option premium is the sum of time value and intrinsic value. Any amount by which an option premium exceeds the option's intrinsic value can be considered time value. Also referred to as extrinsic value.
The general direction of the market.


Underlying Futures Contract
The corresponding futures contract that may be purchased or sold upon the exercise of an option.


The number of transactions in a futures or options on futures contract made during a specified period of time.


An individual who sells an option.