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
- 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
- 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
- Always seek the advice of other persons such as a knowledgeable
financial advisor, attorney or accountant before making any major
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.