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GLOSSARY

The terminology used in discussing, analyzing, and reporting on alternative investments isn't necessarily a different language, but you may need a new dictionary. Whether you think Sharpe is a type of marker, or just need a quick refresher, our Glossary lays out the unique lingo of Managed Futures and Trading System investments in simple language.

Accredited Investor

 

Generally speaking, non-normal investors, or any individual or company who either through being sufficiently wealthy (net worth over $1 Million), knowledgeable of investments due to association with an industry related company, or outside of the jurisdiction of US law, are considered sophisticated investors.

Actual Client Fill Results/Trades

 

Attain keeps two types of trading results for trading systems, those based on Actual Client Fills and those based on Computer Generated Fills. Actual Client Fills are based on those trades which actually happened in a client's account on a single contract basis, with profits of at least the amount shown, and losses of no more than the amounts shown in each of the actual client accounts following the specified trading system.

Alternative Investments

 

The investments Attain specializes in are termed Alternative investments, as they are not mainstream investments into common things like stocks, bonds, and real estate; instead dealing in derivatives on those instruments and traditional commodities markets. The benefit of alternative investments is their ability to achieve returns independent of the stock market.

Alternative Investments

 

The investments Attain specializes in are termed Alternative investments, as they are not mainstream investments into common things like stocks, bonds, and real estate; instead dealing in derivatives on those instruments and traditional commodities markets. The benefit of alternative investments is their ability to achieve returns independent of the stock market

Arbitrage

 

The simultaneous purchase and sale of similar commodities in different markets to take advantage of a price discrepancy.

Assets Under Management

 

The amount of money a professional Commodity Trading Advisor (or Hedge Fund, Commodity Pool, etc) manages for his or her clients, often quoted both per individual program and in total across all of an advisor's programs.

At-the-Money Option

 

An option whose strike price is equal-or approximately equal-to the current market price of the underlying futures contract.

Bid

 

An expression of willingness to buy a commodity at a given price; or the price other market participants are willing to buy at, the opposite of Offer.

Broker

 

A company or individual that executes futures and options orders on behalf of financial and commercial institutions and/or the general public. Commodities brokerage firms and their brokers are regulated by, and required to register with, the National Futures Association and Commodity Futures Trading Commission.

Call Option (American Style)

 

An option which gives the buyer the right, but not the obligation, to purchase ("go long") the underlying futures contract at a certain "strike price" on or before the expiration date.

Cash Settlement

 

A method of settling certain futures or options contracts whereby the market participants settle in cash (payment of money rather than delivery of the commodity).

Clearing

 

The process by which a clearinghouse maintains records of all trades and settles margin flow on a daily mark-to-market basis for its clearing members.

Clearing Firm

 

The clearing firm acts as an intermediary between the customer, brokerage firm, and the various futures exchanges. The clearing firm owns the expensive memberships allowing them to transact business on the exchanges on the customer's behalf, while Attain deals directly with the customer and uses the clearing firm to process customer trades.

Closing Range

 

A range of prices at which futures transactions took place during the close of the market.

Commission

 

A fee charged by a broker to a customer for executing a transaction.

Commodity Futures Trading Commission (CFTC)

 

The federal regulatory agency established in 1974 that administers the Commodity Exchange Act.The CFTC monitors the futures and options on futures markets in the United States.

Commodity Pool

 

An enterprise in which funds contributed by a number of persons are combined for the purpose of trading futures or options contracts, similar to how a mutual fund pools investors money together to trade stocks. Also referred to as a Pool.

Commodity Pool Operator (CPO)

 

An individual or organization which operates or solicits funds for a commodity pool. A CPO may be required to be registered with the CFTC.

Compound Rate of Return

 

The annual rate of return which, if compounded over the number of years in the period analyzed, would yield the cumulative gain or loss achieved during that period.

Computer Generated Fills

 

Attain keeps two types of trading results for trading systems, those based on Actual Client Fills and those based on Computer Generated Fills. Those based on Computer Generated Fills are considered Hypothetical, as they The 2nd type of trade results: these are "fake" trades, which were generated by the computer by running the system on historical price data, and hypothetical results are monthly and annual returns based on those computer generated trades.

Contract Month

 

The month in which delivery is to be made in accordance with the terms of the futures contract. For example: "December " Corn. Also referred to as Delivery Month.

Correlation

 

Correlation is a statistical figure between -1.00 and +1.00 which shows how inter-related two investments are. If they have a correlation of 1.00, they are exactly the same, making money when the other one does and losing money when the other one does. If they are at -1.00, they are exactly opposite, with one making money when the other loses money, and vice versa. The ideal situation is to have the correlation be 0.00, which tells us they act independently of one another.

Covered Option

 

A short call or put option position which is covered by the sale or purchase of the underlying futures contract or physical commodity.

Daily Confirmation Statement

 

A statement sent by a client's Clearing Firm when a futures or options position has been initiated. The statement shows the price and the number of contracts bought or sold. Sometimes combined with a Purchase and Sale Statement.

Day Order

 

An order that if not executed expires automatically at the end of the trading session on the day it was entered

Day Trading

 

At Attain, we define day trading as trading in which all trades done by a system or manager have been exited by the end of the day. Day Trading often makes one think of hundreds of trades per day, but the fact is most of the day trading systems at Attain trade only 10-20 times per month on average.

Delivery

 

The transfer of the actual physical commodity (Corn or Crude Oil, for example) from the seller of a futures contract to the buyer of a futures contract. Each futures exchange has specific procedures for delivery of the physical commodity. Some futures contracts, such as stock index contracts, are cash settled.

Derivative

 

A financial instrument, traded on or off an exchange, the price of which is directly dependent upon the value of one or more underlying securities, equity indices, debt instruments, commodities, other derivative instruments, or any agreed upon pricing index or arrangement. Derivatives involve the trading of rights or obligations based on the underlying product but do not directly transfer that product. They are generally used to hedge risk.

Disclosure Document

 

A disclosure document is a document outlining the specific terms, conditions, and risks of a Commodity Trading Advisor's program. Also referred to as the "D-Doc", this is submitted to government regulators, and must be signed by both the CTA and the client, in order to start trading.

Discretionary Account

 

An arrangement by which the owner of the account gives written power of attorney to someone else, usually the broker or a Commodity Trading Advisor, to buy and sell without prior approval of the account owner. Also referred to as a Managed Account.

Drawdown

 

A drawdown is the worst "pain" experienced by an investor in a specific investment. For futures trading, this number is a valuable measure of risk for a trading system or CTA. As an example, an investor starting out with a $100,000 account, who sees it fall down to $80,000 before it runs back up to $110,000 saw a $20,000 loss ($100K - $80K), which would equal a 20% ($20K/$100K) drawdown.

Equity

 

Refers to the value of a futures trading account, or value of a money, as in: "How much equity are you looking to invest

Equity Curve

 

Using monthly percentage gains and losses on a hypothetical $1,000 investement, one can chart the monthly value of the investement, creating an 'Equity Curve' which portrays in graphical format any run ups, drawdowns, and so on.

Exercise

 

The action taken by the holder of a call option if he wishes to purchase the underlying futures contract or by the holder of a put option if he wishes to sell the underlying futures contract.

Expiration Date

 

Generally the last date on which an option may be exercised. It is not uncommon for an option to expire on a specified date during the month prior to the delivery month for the underlying futures contracts.

First Notice Day

 

The first day on which notice of intent to deliver a commodity in fulfillment of an expiring futures contract can be given to the clearinghouse by a seller and assigned by the clearinghouse to a buyer. Varies from contract to contract.

Floor Broker

 

An individual who executes orders on the trading floor of an exchange for any other person.

Forward (Cash) Contract

 

A contract which requires a seller to agree to deliver a specified physical commodity to a buyer sometime in the future, where the parties expect delivery to occur. All terms of the contract may be customized, in contrast to futures contracts whose terms are standardized.

Fundamental Analysis

 

A method of anticipating future price movement using supply and demand information.

Futures Commission Merchant (FCM)

 

FCM is another name for the Clearing Firm. The FCM acts as an intermediary between the customer, brokerage firm, and the various futures exchanges. The FCM owns the expensive memberships allowing them to transact business on the exchanges on the customer's behalf, while Attain deals directly with the customer and uses the FCM to process customer trades. An FCM must be registered with the CFTC.

Futures Contract

 

A legally binding agreement to buy or sell a commodity or financial instrument at a later date. Futures contracts are normally standardized according to the quality, quantity, delivery time and location for each commodity, with price as the only variable.

Hedge Fund

 

A hedge fund is a private investment fund. Hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for a minimum period of at least one year. Attain offers products very similar to hedge funds in their returns and risk, but they are technically NOT hedge funds, as the investments are held in individual accounts for the investors, not pooled together to make one fund.

Hedging

 

The practice of offsetting the price risk inherent in any cash market position by taking an opposite position in the futures market. A long hedge involves buying futures contracts to protect against possible increasing prices of commodities. A short hedge involves selling futures contracts to protect against possible declining prices of commodities.

High Price

 

The highest price of the day for a particular futures or options on futures contract.

Hypothetical Results

 

These type of performance records are artificially generated on past date, and do not represent any actual results achieved by customers. There are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight.

Hypothetical Trades

 

The 2nd type of trade results: these are "fake" trades, which were generated by the computer by running the system on historical price data, and hypothetical results are monthly and annual returns based on those computer generated trades.

In-the-Money Option

 

An option that has intrinsic value. A call option is in-the-money if its strike price is below the current price of the underlying futures contract. A put option is in-the-money if its strike price is above the current price of the underlying futures contract.

Initial Margin

 

The amount a futures market participant must deposit into a margin account at the time an order is placed to buy or sell a futures contract. See also Margin.

Introducing Broker (IB)

 

A firm or individual that solicits and accepts commodity futures orders from customers but does not accept money, securities or property from the customer, instead passing that function on to the Clearing Firm. All Introducing Brokers must be registered with the CFTC.

IRA

 

An IRA is shorthand for an Individual Retirement Account, which is a tax-deferred retirement account that allows individuals to set aside money each year until a given age at which time it can be cashed out and then taxed. Traditionally, IRAs were not allowed to invest in futures, but new laws and some forward thinking trust companies have allowed it, opening up the world of alternative investments to people's retirement funds.

Last Trading Day

 

The last day on which trading may occur in a given futures or option.

Leverage

 

The ability to control large dollar amounts of a commodity with a comparatively small amount of capital. Also, when trading a CTA with Notional funds, for example, having the advisor trade $50,000 as $100,000 that account can be said to be leveraged 2 to 1.

Liquidate

 

To sell a previously purchased futures or options contract or to buy back a previously sold futures or options position. Also referred to as Offset.

Liquidating Value (LV)

 

The value of a futures trading account if all open positions were offset at the current market price; also referred to as account equity

Liquidity (Liquid Market)

 

A characteristic of a security or commodity market with enough units outstanding and enough buyers and sellers to allow large transactions without a substantial change in price.

Local

 

A member of an exchange who trades for his own account.

Long

 

One who has bought futures contracts or options on futures contracts or owns a cash commodity. A long trade profits when prices go UP.

Low Price

 

The lowest price of the day for a particular futures or options on futures contract.

Maintenance Margin

 

A set minimum amount (per outstanding futures contract) that a customer must maintain in his margin account to retain the futures position. See also Margin.

Managed Account

 

An arrangement by which the owner of the account gives written power of attorney to someone else, usually the broker or a Commodity Trading Advisor, to buy and sell without prior approval of the account owner. Also referred to as a Managed Account.

Managed Futures

 

Managed futures is the investment category name for an investment in a managed account with a professional Commodity Trading Advisor (CTA) Just as stocks, bonds, or real estate are separate investment categories for an investor to put part of their overall capital, so to is managed futures.

MAR Ratio

 

A risk adjusted return ratio which helps investors measure returns per unit of risk, and therefore compare managers with differing risk and reward profiles on that basis. The MAR ratio measures return per unit of risk, with risk defined as the maximum drawdown. The formula is: MAR = (Compound ROR) / (Max DD)

Margin

 

An amount of money deposited by both buyers and sellers of futures contracts and by sellers of options contracts to ensure performance of the terms of the contract (the making or taking delivery of the commodity or the cancellation of the position by a subsequent offsetting trade). Margin in commodities is not a down payment, as in securities, but rather a performance bond. See also Initial Margin, Maintenance Margin and Variation Margin.

Margin Call

 

A call from a clearinghouse to a clearing member, or from a broker or firm to a customer, to bring margin deposits up to a required minimum level.

Mark-to-Market

 

To debit or credit on a daily basis a futures account based on the close of that day's trading session. In this way, buyers and sellers are protected against the possibility of contract default.

Market Open

 

The period at the beginning of the trading session officially designated by the exchange during which all transactions are considered made "at the open."

Market Order

 

An order to buy or sell a futures or options contract at whatever price is obtainable when the order reaches the trading exchange.

Maximum Price Fluctuation

 

The maximum advance or decline, from the previous day's settlement price, permitted for a futures contract in one trading session. Also referred to as Maximum Price Fluctuation.

Minimum Price Fluctuation

 

The smallest increment of price movement for a futures contract. Also referred to as a Tick.

Naked Option

 

A short call or put option position which is not covered by the purchase or sale of the underlying futures contract or physical commodity. Also referred to as a Uncovered Option.

National Futures Association (NFA)

 

Authorized by Congress in 1974 and designated by the CFTC in 1982 as a "registered futures association," NFA is the industrywide self-regulatory organization of the futures industry.

Nearby Delivery Month

 

The futures contract month closest to expiration. Also referred to as the Spot Month.

Net Asset Value

 

The value of each unit of participation in a commodity pool. Basically a calculation of assets minus liabilities plus or minus the value of open positions when marked to the market, divided by the total number of outstanding units.

Net Performance

 

An increase or decrease in net asset value exclusive of additions, withdrawals and redemptions. Also refers to a performance record which includes (that is, deducts for) all commissions, fees, and other expenses. All of the numbers on Attain's website show net performance.

Notional Funds

 

One of the big benefits of futures trading, notional funding is the ability to use "imaginary money" to fund a portion of an investor's account. This is due to the built in leverage of futures, which allow an investor to control amounts up to 10 times the amount of cash they have in their account. The actual cash balance plus the additional "imaginary money" is the amount of the total notional amount of the investment.

Offer Price

 

An indication of willingness to sell a futures contract at a given price; or the price at which other market participants are willing to sell at. The opposite of Bid.

Open Interest

 

The total number of futures or options contracts of a given commodity that have not yet been offset by an opposite futures or option transaction nor fulfilled by delivery of the commodity or option exercise. Each open transaction has a buyer and a seller, but for calculation of open interest, only one side of the contract is counted.

Open Outcry

 

A method of public auction for making bids and offers in the trading pits of futures exchanges.

Open Trade Equity

 

The unrealized gain or loss on open positions in a futures trading account. The accounts cash balance (usually labeled ACB) plus the Open Trade Equity will equal the Liquidating Value of the account.

Opening Range

 

The range of prices at which buy and sell transactions took place during the opening of the market.

Option Buyer

 

The purchaser of either a call or put option. Option buyers receive the right, but not the obligation, to assume a futures position.Also referred to as a Holder.

Option Contract

 

A contract which gives the buyer the right, but not the obligation, to buy or sell a specified quantity of a commodity or a futures contract at a specific price within a specified period of time. The seller of the option has the obligation to sell the commodity or futures contract or to buy it from the option buyer at the exercise price if the option is exercised. See also Call Option and Put Option.

Option Premium

 

The price a buyer pays (and a seller receives) for an option. Premiums are arrived at through the market process. There are two components in determining this price-extrinsic (or time) value and intrinsic value.

Option Seller

 

A person who sells an option and assumes the potential obligation to sell (in the case of a call) or buy (in the case of a put) the underlying futures contract at the exercise price. Also referred to as an Option Grantor.

Out-of-the-Money Option

 

A call option with a strike price higher or a put option with a strike price lower than the current market value of the underlying asset (i.e., an option that does not have any intrinsic value).

Over-the-Counter Market (OTC)

 

A market where products such as stocks, foreign currencies and other cash items are bought and sold by telephone, Internet and other electronic means of communication rather than on a designated futures exchange.

Pit

 

The area on the trading floor where trading in futures or options contracts is conducted by open outcry. Also referred to as a ring.

Position Limit

 

The maximum number of speculative futures contracts one can hold as determined by the CFTC and/or the exchange where the contract is traded. See also Price Limit, Variation Limit.

Price Limit

 

The maximum advance or decline, from the previous day's settlement price, permitted for a futures contract in one trading session. Also referred to as Maximum Price Fluctuation. See also Position Limit, Variation Limit.

Purchase and Sale Statement (P&S)

 

A statement sent by a Futures Commission Merchant to a customer when a futures or options position has been liquidated or offset. The statement shows the number of contracts bought or sold, the prices at which the contracts were bought or sold, the gross profit or loss, the commission charges and the net profit or loss on the transaction. Sometimes combined with a Confirmation Statement.

Put Option

 

An option which gives the buyer the right, but not the obligation, to sell the underlying futures contract at a particular price (strike or exercise price) on or before a particular date.

QEP (Qualified Eligible Participant)

 

Generally speaking, non-normal investors, or any individual or company who either through being sufficiently wealthy, knowledgeable of investments due to association with an industry related company, or outside of the jurisdiction of US law, are sophisticated enough to not require US regulator protection. Many CTA programs set up in this manner do no have or require clients to review a disclosure document.

Range

 

The difference between the high and low price of a commodity during a given trading session,week, month, year, etc

Regulations (CFTC)

 

The regulations adopted and enforced by the CFTC in order to administer the Commodity Exchange Act.

Reportable Positions

 

The number of open contracts specified by the CFTC when a firm or individual must begin reporting total positions by delivery month to the authorized exchange and/or the CFTC.

Risk Adjusted Ratios

 

These are several ratios which allow investors to compare different types of investments with each other. Which is better, and investment which makes 100% per year, but risks 50% - or one which makes just 20%, but risks only 5%. Risk adjusted ratios such as the Sharpe, Sterling, and Sortino allow investors to compare the two very different products by looking at return per unit of risk (or risk adjusted)

Risk Disclaimer

 

A risk disclaimer is the pseudo- legal document regulations require Attain to post on seemingly everything. The disclaimer points out all of the risk associated with a certain type of investing or in a certain market.

Round Turn

 

A completed futures transaction involving both a purchase and a liquidating sale, or a sale followed by a covering purchase. Commission rates are normally quoted per Round Turn.

Scalper

 

A trader who trades for small, short-term profits during the course of a trading session, rarely carrying a position overnight.

Segregated Account

 

Firms and principals of firms in the futures industry are required to maintain their customers' funds and margin deposits in bank accounts which are totally separate from their own. Rules further stipulate that such funds can be used only for the purposes the customers intended and can at no time be commingled with the firm's funds or the funds of the firm's principals. Compliance is strictly enforced and regulators possess power to take such immediate action as is considered necessary to protect the security of customers' money. Also referred to as Customer Segregated Funds.

Settlement Price

 

The last price paid for a futures contract on any trading day. Settlement prices are used to determine open trade equity, margin calls and invoice prices for deliveries.Also referred to as Closing Price.

Sharpe Ratio

 

A risk adjusted return ratio which helps investors measure returns per unit of risk, and therefore compare managers with differing risk and reward profiles on that basis. The Sharpe ratio measures return per unit of risk, with risk defined as the standard deviation of returns. The formula is: Sharpe = (Compound ROR risk free ROR) / (Standard Deviation of Returns) Attain uses a risk free ROR of 2% in calculating the Sharpe ratio.

Short

 

One who has sold futures contracts or options on futures. A Short trade profits when prices go DOWN.

Sortino Ratio

 

A risk adjusted return ratio which helps investors measure returns per unit of risk, and therefore compare managers with differing risk and reward profiles on that basis. The Sortino ratio measures return per unit of risk, with risk defined as the standard deviation of negative returns. The formula is: Sortino = (Compound ROR risk free ROR) / (Standard Deviation of Negative Returns)

Speculator

 

A market participant who tries to profit from buying and selling futures and options contracts by anticipating future price movements. Speculators assume market price risk and add liquidity and capital to the futures markets.

Spreading

 

The buying and selling of two different delivery months or related commodities in the expectation that a profit will be made when the position is offset.

Sterling Ratio

 

A risk adjusted return ratio which helps investors measure returns per unit of risk, and therefore compare managers with differing risk and reward profiles on that basis. The Sterling ratio measures return per unit of risk, with risk defined as the average annual drawdown. The formula is: Sterling = (Compound ROR) / (Avg. Ann DD 10%)

Stop Order

 

An order that becomes a market order when the futures contract reaches a particular price level. A sell stop is placed below the market, a buy stop is placed above the market.

Strike Price

 

The price at which the buyer of a call (put) option may choose to exercise his right to purchase (sell) the underlying futures contract. Also called Exercise Price.

T-Bills

 

Futures accounts don't offer interest as a stock or savings account would. Instead, investors can purchase US Govt. T-Bills, which are 30, 90, or 180 day bonds, which pay interest.

Technical Analysis

 

One approach to analyzing futures markets which examines patterns of price change, rates of change, and changes in volume of trading, open interest and other statistical indicators. See also Charting.

Tick

 

The smallest increment of price movement for a futures contract. Also referred to as Minimum Price Fluctuation

Time Decay

 

A unique feature of option positions, in which the Extrinsic Value, or Time Value, of an option declines as that option nears its expiration date. At the expiration date, the time value will be zero, as there is no time left for the underlying price to move up or down.

Time Value

 

The amount of money options buyers are willing to pay for an option in 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.

Trading System Developer

 

The trading systems available to clients at Attain are almost exclusively designed, marketed, and sold by 3rd parties. We generally refer to these individuals and companies as 3rd Party Developers. The developers usually charge a small fee of $30 - $200 per month for the client to use their system.

Uncovered Option

 

A short call or put option position which is not covered by the purchase or sale of the underlying futures contract or physical commodity. Also referred to as a Naked Option.

Underlying Futures Contract

 

The specific futures contract that the option conveys the right to buy (in case of a call) or sell (in the case of a put).

Variable Limit

 

A price system that allows for larger than normal allowable price movements under certain conditions. In periods of extreme volatility, some exchanges permit trading at price levels that exceed regular daily price limits. See also Position Limit, Price Limit.

Volatility

 

Statistically, a measurement of the change in price over a given time period. Option sellers are generally referred to as short volatility traders, as option prices reflect the future assumptions about how far prices will change over a certain time. The VIX index is an often used price index of volatility

Volume

 

The number of purchases and sales of futures contracts made during a specified period of time, often the total transactions for one trading day.

Yield

 

A measure of the annual return on an investment.

Questions? Contact Attain or give us a call at 312.604.0926.

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Important Risk Disclosure
Important risk disclosure for alternative investments