By Grant Mercer
A reference article for futures students — an expanded glossary companion to Futures Under Fire.
This glossary defines the essential vocabulary of commodity futures trading and risk, expanding on the book's Glossary of Key Terms. Terms are grouped by theme. Definitions are educational — they explain what each term means, not how to trade on it.
Market basics
Backwardation — forward-curve condition in which near-dated futures prices are higher than longer-dated ones; typically signals physical supply tightness.
Basis — the price differential between a physical commodity at a specific location/quality and the benchmark futures contract (cash minus futures).
Calendar spread — the price differential between two futures months for the same commodity; reflects storage costs, convenience yield, and expected supply-demand dynamics.
Contango — forward-curve condition in which longer-dated futures prices are higher than near-dated ones; typically reflects storage costs and the cost of money.
Convenience yield — the implied benefit of holding the physical commodity rather than a futures contract (availability for production, protection against stockouts).
Forward curve (term structure) — the full set of futures prices across all listed delivery months, plotted against time.
Roll yield — the return component from rolling a futures position from an expiring contract into a later-dated one; positive in backwardation, negative in contango.
Spot price — the price for immediate delivery of the physical commodity.
Tick — the minimum price movement of a futures contract.
Volume — the number of contracts traded in a period; distinct from open interest.
Risk and measurement
Alpha — return attributable to skill or strategy, beyond what market exposure alone explains.
Beta — return attributable to general market exposure rather than skill.
Correlation — statistical measure (–1 to +1) of how two price series move together; correlations are unstable and tend toward +1 across risky assets during crises.
Drawdown — the peak-to-trough decline in an account or strategy's value, usually as a percentage.
Expected shortfall (conditional VaR) — the average loss in the worst cases beyond a confidence threshold.
Fat tails — return distributions in which extreme outcomes occur far more frequently than a normal distribution predicts.
Sharpe ratio — average excess return per unit of volatility; sensitive to measurement period and understates tail risk.
Value at Risk (VaR) — estimate of maximum expected loss over a horizon at a confidence level; assumes stable distributions and ignores losses beyond the threshold.
Volatility — degree of price variation over time; realized (past moves) vs. implied (backed out of option prices, reflecting expected future variation).
Volatility clustering — the tendency of large price moves to cluster in time; one reason static risk estimates fail.
Execution and market structure
Bid-ask spread — the gap between the highest bid and lowest offer; the minimum cost of immediacy.
Block trade — a large trade negotiated bilaterally and reported to the exchange, outside the central order book.
Iceberg order — an order displaying only a small visible portion of its total size.
Latency — time delay between an event and its observation or execution; measured in microseconds in modern markets.
Limit order — an order to buy/sell at a specified price or better; provides liquidity, execution not guaranteed.
Limit up / limit down — the maximum daily price move an exchange permits; a major source of execution risk.
Market impact — the price movement caused by the execution of an order itself.
Market order — an order to buy/sell immediately at the best available price; guarantees execution, not price.
Open interest — total outstanding futures contracts not yet offset or delivered.
Order book depth — quantity of contracts resting at each price level in the limit order book.
Settlement price — the official daily reference price set by the exchange; used for mark-to-market margining.
Slippage — the difference between the expected price of a trade and the actual execution price.
Spoofing — placing orders with no intention to execute to create a false impression of supply or demand; illegal in regulated markets.
Stop order — becomes a market order once a trigger price is reached; in fast markets the fill can differ significantly from the trigger.
TWAP / VWAP — time-weighted and volume-weighted average price benchmarks for execution evaluation.
Clearing, margin, and credit
Clearinghouse — the central counterparty to every cleared trade; mutualizes counterparty risk through margining and a default waterfall.
Default waterfall — the ordered sequence of resources a clearinghouse uses to cover a defaulting member's losses.
FCM (Futures Commission Merchant) — the brokerage firm through which traders access futures exchanges.
Initial margin — collateral required to open a futures position.
Maintenance margin — minimum account equity sustained while a position is open; falling below it triggers a margin call.
Margin call — demand for additional funds when equity falls below maintenance; correlated margin calls create forced selling — the margin-call spiral.
Mark to market — daily revaluation of positions at the settlement price, with gains credited and losses debited.
Variation margin — the daily cash settlement of mark-to-market gains and losses.
Hedging and positions
Basis risk — the risk that the basis (cash minus futures) moves adversely; the central imperfection in every hedge.
Cross-hedge — hedging an exposure with a futures contract on a related but different commodity.
EFP (Exchange for Physical) — a privately negotiated futures-for-physical exchange, reported to the exchange; a bridge between paper and physical markets.
Hedge ratio — size of the futures position relative to the underlying exposure; estimated, unstable, and itself a source of risk.
Long / short — long profits from rising prices; short from falling prices; both are contractual obligations in futures, not ownership.
Position limit — maximum contracts one participant may hold, set by exchange or regulator.
Short squeeze — rapid price spike as short sellers rush to cover simultaneously.
Stack and roll — hedging long-term exposure with stacked near-dated futures, rolled forward; famously implicated in Metallgesellschaft's 1993 losses.
Regulation and data
CFTC (Commodity Futures Trading Commission) — the U.S. federal regulator of commodity futures, options, and swaps markets.
COT (Commitments of Traders) report — weekly CFTC publication of open interest by trader category; informative about who holds what, not what happens next.
NFA (National Futures Association) — the self-regulatory organization for the U.S. derivatives industry.
OTC (over-the-counter) — bilaterally negotiated transactions; customizable, with counterparty risk unless cleared.
ISDA Master Agreement — the standard legal framework governing OTC derivatives transactions.
Learning and decision concepts
Attribution — decomposing performance into skill, beta, and luck; small samples cannot solve it.
Base rate — the background frequency of an outcome in a reference class; sound probabilistic judgment starts here.
Hindsight bias — after an outcome is known, perceiving it as having been predictable.
Narrative fallacy — preferring compact stories over statistical explanations; an elegant explanation of the past doesn't imply predictive power.
Outcome bias ("resulting") — judging decision quality by outcome quality (Annie Duke's resulting).
Overfitting — fitting a model so closely to historical data that it captures noise; beautiful backtests, live-market failure.
Regime — a persistent set of market conditions; strategies are creatures of regimes.
Survivorship bias — distortion from observing only survivors: existing contracts, non-blown-up traders, persisted markets.
Walk-forward testing — validating by repeatedly training on past data and testing on the next out-of-sample period; the minimum honest standard for backtests.This glossary is a study reference. Terms are defined as the book and course use them; for contract-specific details (tick sizes, limits, settlement procedures), consult the relevant exchange's current rulebook.
Risk disclosure: There is a substantial risk of loss in trading commodity futures and options products. Losses in excess of your initial investment may occur. Past performance is not necessarily indicative of future results.