Consider your financial experience, goals, and financial resources and know how much you can afford to lose above and beyond your initial payment.

  1. Understand commodity futures and option contracts and your obligations before entering into those contracts.
  2. Understand your exposure to risk and other aspects of trading by thoroughly reviewing the risk disclosure documents your broker is required to give you.
  3. Know whom to contact if you have a problem or question.

The purpose of this brochure is to provide you with general information about trading commodity futures and options and to encourage you to ask more questions and gather more information before you open an account.

UNDERSTAND YOUR FINANCIAL GOALS AND RESOURCES

Who trades in commodity futures and options and why?

Most of the participants in the futures and options markets are commercial and institutional users of the commodities they trade. For example, a company or individual who holds an asset such as coffee, corn, soybeans, U.S. Treasury bonds, or a portfolio of stocks, wants the value of that asset to increase. That person also wants to limit, if possible, any loss in value. The company or individual may use the commodity markets to take an opposite position that can minimize the risk of financial loss from holding those assets when and if their price changes. This is called “hedging.”

Other participants are speculators who hope to profit from changes in the price of the futures contract. A speculator buying a futures contract or call option, or selling a put option, hopes to profit from rising prices, while a speculator selling a futures contract or call option, or buying a put option, hopes to profit from declining prices. Because, unlike a hedger, a speculator does not own the underlying commodity, the components of the underlying index, or other product, losses in the futures market are not offset by gains in the cash market, and speculators can lose substantial amounts.

Individuals do participate in the market. An individual who owns or runs a business might participate as a hedger. Or, an individual with a substantial and diversified portfolio of investments might speculate using futures or options contracts. Individual investors should also have adequate resources to absorb the significant losses that can occur in futures and option trading.

Can futures and option trading meet my investment goals?

Futures and option trading is inherently complex and risky, and it is not appropriate for all investors. You should know how much you potentially can lose and honestly evaluate if you can afford to lose it in view of your financial resources and investment goals. You should share your conclusions with your broker. If you decide you have the resources and the reasons to invest in futures, you should also determine the extent to which you plan to rely on advice from a broker versus making your own trading decisions. Then you should evaluate and compare the methods of trading before choosing the one you feel will best implement your goals. Finally, set some limits on the duration of your investment and the amount of loss you are willing to incur. Like other financial markets, futures and options markets are cyclical and gains may not be immediate. Finally, remember that, because of the leveraged nature of futures, losses can be more than your original deposit.

Is there anything I should watch out for?

First, if it sounds too good to be true, it probably is. Promises of huge returns with limited risk are usually false. Be on the alert for anyone who downplays the importance of the disclosure statement; you should always receive one and always read it thoroughly before you open an account. Do your homework! Don’t be pressured to “act now.” Always ask questions. Beware when a salesperson tells you to borrow money to invest, and never agree to give money to someone you have never met. Watch out for guarantees of profit or boasts about past performance. Do not rely on promises of profits due to “predictable” seasonal or market cycles or claims based on the impact of current news events.

Before you open an account, you should always check on the company’s or individual’s registration status by calling the National Futures Association (the private self-regulatory body that handles registration processing for the CFTC) at its toll-free number: 1-800-621-3570. The NFA’s Information Center can also be contacted through the Internet by sending an email message to NFA’s website at www.nfa.futures.org. The NFA can also provide information on any disciplinary actions that have been brought against a registrant. Information on sanctions in effect against commodity professionalsis also available on the CFTC’s website at www.cftc.gov.