Chapter 4: A Pre-Investment Checklist
- Take the time to check out any firm or indi-vidual that you
don’t know through previous experience or reputation. All
firms and per-sons offering options on U. S. futures contracts
are required by law to be registered with the Commodity Futures
Trading Commission (CFTC) and to be Members of National Fu-tures
Association (NFA). You can do this quickly, easily and without
cost by accessing NFA’s Background Affiliation Status Informa-tion
Center (BASIC), located at NFA’s web site (www.nfa.futures.org).
BASIC will provide you with the firm and/or individual’s
registra-tion status as well as any disciplinary actions taken
by NFA, the CFTC or any U.S. exchanges. This same information
is also available by call-ing NFA toll-free at 800-621-3570.
- Understand what a firm’s commission charges will be and
how they’re calculated. If the charges seem high—either
on a dollar basis or as a percentage of the option pre-mium—
you might want to seek comparison quotes from one or two other
firms. If a firm seeks to justify an unusually high commission
charge on the basis of its services or perfor-mance record, you
might want to ask for a detailed explanation or documentation
in writing.
- Calculate exactly the break-even price for any option you are
considering buying or writing. You should know the specific futures
price above or below which the option, at expiration, will be
profitable.
- Read and fully understand the required Risk Disclosure Statement
before making any commitment to purchase or write an option.
- Learn enough about the commodity you would be investing in to
have a reasonable ex-pectation that the necessary price change
will occur prior to the expiration of the option. Be certain you
understand the risks inherent in acquiring a futures position
through the exer-cise of an option.
- Don’t purchase an option unless you understand that you
could lose your entire investment. Don’t write an option
unless you understand that option writing involves poten-tially
unlimited losses. And don’t make any investment commitment
unless the money you could potentially lose can legitimately be
regarded as risk capital.
- Don’t make any investment on the basis of high-pressure
sales tactics. Reputable firms don’t operate that way. It’s
far better to miss out on an investment opportunity than to be
rushed into a decision you may later regret. And don’t make
an investment that is pre-sented to you as a sure thing. They
don’t exist!
- Always seek the advice of other persons such as a knowledgeable
financial advisor, attorney or accountant before making any major
investment decision.
Past performance is not indicative of future results. Trading futures and options is not suitable for everyone. There is a substantial risk of loss in trading commodity futures, options and off exchange forex.
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