I went to one of my alma mater’s today and spoke with undergraduate Finance students. First, let me say this. They are so far ahead of where I was at the same stage it’s not even funny. I am amazed at how much more worldly college age kids are than we were, ahem, over 25 years ago.
One of the things that stumps people about trading and finance is the verbiage. In my little presentation, I dropped easily into shop talk. That puts people off because they can’t get around the terms. So, here is a short guide to trader talk. Of course, some words from the old open outcry days are useless. Defining “How do you go up?’ is senseless, since it only matters in a pit and not on a screen.
Cars-these are essentially like shares of stock. When we sell or buy 100 cars, we are doing 100 contracts of a particular commodity. Another real old fashioned term for these is “loads”. Commodities were delivered by railroad cars, and one contract represented one car in theory.
tick-the minimum movement in a market. so the move from 1 to 2, is a tick. Tick values from contract to contract are NOT the same. They change given the way the contract is priced, or structured. To figure out your risk, you multiply the number of contracts you have by the tick value-that’s how much you make per tick (or lose)
handle-a particular move in a commodity. So in lean hogs if it goes from .5500 to .5600, that is one handle. Since a tick is worth $4, a one car position will make or lose $400. They are quoted in cents per pound. Eurodollars trade in half ticks, .9900 to .9900.5, which equals $12.50. The actual interest rate is 1-.9900=1%. (In 1979, T-bills which were the dominant short term rate at the time were trading around .7900-.8400!)
house-the clearing house that you use to clear your trades. I clear Shepard Trading, a boutique clearing house in Chicago. Love clearing there. Would recommend it to anyone.
front end-the software program you use to trade with. some are proprietary, some are off the rack. Trading Technologies is probably the most popular, but there are others.
juice-how much margin you have to put up per contract to hold a position.
rollover-in financial markets, 4 times a year, big funds will roll their positions from the lead contract which is expiring to the next contract.
puke-getting out of a position, usually at a loss
short-selling contracts with the intention of buying them back cheaper
long-buying contracts and with the intention of selling them back at a higher price
spread-buying one contract, selling another. you try to play a momentum game. one contract should move faster than another in a directional trade, allowing you to make money. In theory, spreads are less risky than trading one outright contract-but don’t hold any trader to that. You can lose big money in spreads.
Leg-when you get out of a spread, sometimes you buy/sell just one month and let the other month ride. Legging into or out of a spread. Risky trade, but if you are good a chance to earn a few extra bucks. Most good spreaders are good leggers. Ignore the sexual innuendo of spreading and legs in the same sentence.
limit-how high or how low a contract can go in a particular trading day. most commodities have limits. Equity futures have circuit breakers, and one hard limit(only on the downside)
stop-an order above or below the market that takes you out of your position. Once it is “elected” or the stop price trades, the order becomes a market order. Filled at whatever the prevailing price is. Buy stops go above the bid/ask spread, sell stops below.
If there are any traders reading this, feel free to add more in the comments.
Oh, and Goldman is Dracula. ( : or should it be ? ] :