The overarching financial contract that grants the buyer the right, but not the obligation, to buy (Call) or sell (Put) an asset.
Option
The predetermined price at which the buyer of a call or put option can buy or sell the underlying asset.
Strike Price (or Exercise Price)
The price the buyer pays to the seller (or writer) for the option contract. This is the maximum loss for the buyer.
Premium
The financial security, commodity, or index that the option contract is based on.
Underlying Asset
The last date on which the option contract can be exercised.
Expiration Date
An option that has intrinsic value. A Call is ___ if the stock price is above the strike price. A Put is ___ if the stock price is below the strike price.
In-the-Money (ITM)
The party who sells an option and receives the premium. They have the obligation to fulfill the contract if the buyer chooses to exercise it.
Writer (or Seller)
A standardized legal agreement to buy or sell a commodity or financial instrument at a specific price at a predetermined date in the future.
Futures Contract
The current price of an asset for immediate purchase and delivery (the price right now).
Spot Price
A graphical representation that plots the prices of futures contracts (y-axis) against their different dates of maturity (x-axis). Contango and Backwardation describe the shape of this curve.
Forward Curve (or Term Structure)
The net cost of holding a physical commodity or asset over time. It typically includes storage costs, insurance, and financing (interest), and is the main reason a market is in Contango.
Cost of Carry
The difference between the Spot Price of a commodity and the price of a specific futures contract for that commodity.
Basis
The non-monetary benefit or value derived from having physical possession of a commodity right now (e.g., to keep a factory running), which can be high when supply is tight and is a key factor leading to Backwardation.
Convenience Yield
A market condition where the futures price is higher than the current spot price. Prices for contracts further out in time are progressively higher, creating an upward-sloping futures curve.
Contango
A period of rapid economic expansion, growth, and prosperity.
Boom
A market condition where the futures price is lower than the current spot price. Prices for contracts further out in time are progressively lower, creating a downward-sloping futures curve.
Backwardation
A period of sharp economic decline and contraction, often leading to a recession or, if severe, a depression.
Bust
The formal, technical term for the periodic, but irregular, fluctuations in economic activity.
Business Cycle
A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real Gross Domestic Product (GDP), real income, employment, industrial production, and wholesale-retail sales.
Recession
A sustained, long-term downturn in economic activity characterized by high unemployment, low output and investment, deflation, and business bankruptcies (a particularly severe and prolonged bust)
Depression
A risk management strategy that aims to offset potential losses from price fluctuations in one asset by taking an opposite position in a related asset. The goal of it is generally not to make a profit, but to protect against potential losses and stabilize returns by reducing exposure to specific risks, such as changes in commodity prices, interest rates, or exchange rates.
Hedging
The process of identifying, assessing, and controlling threats to an organization’s capital and earnings, where hedging is a key technique.
Risk Management
A financial contract whose value is derived from an underlying asset, index, or rate (e.g., a stock, a commodity, or an interest rate). Derivatives are the most common instruments used for hedging.
Derivative
An investment position where an investor buys an asset with the expectation that its price will rise. A hedge typically involves taking a short position to offset this long position risk.
Long Position
