Because of the volatile nature of the commodities markets, the purchase and granting of commodity options involve a high degree of risk. Commodity option transactions are not suitable for many members of the public. Such transactions should be entered into only by persons who have read and understood the disclosure statement and who understand the nature and extent of their rights and obligations and of the risks involved in the option transactions covered by the disclosure statement. The following is NOT a complete representation of the disclosure statement for options on futures (this is made available to persons wishing to open a futures and futures options trading account), but it does identify some of the pertinent risks involved with options trading.
Underlying Instrument
Both the purchaser and grantor should know whether the particular option in which they contemplate trading is an option which, if exercised, results in the establishment of a futures contract (an "option on a futures contract") or results in the making or taking of delivery of the actual commodity underlying the option (an "option on a physical commodity"). Both the purchaser and grantor of an option on a physical commodity should be aware that, in certain cases, the delivery of the actual commodity underlying the option may not be required and that, if the option is exercised, the obligations of the purchaser and grantor will be settled in cash.
In the case of an option on a futures contract, both the purchaser and grantor of an option on a futures contract should realize that the option, if exercised, will result in the establishment of a futures position. The buyer of a call option will be assigned a long position in the underlying futures if excercised, while the buyer of a put option will be assigned a short position in the underlying futures if exercised. The purchaser of an option should be aware that some option contracts provide for only a limited period of time during which an option may be exercised.
Risk of Loss
The purchaser of a put or call option is subject to the risk of losing the entire purchase price of the option, in addition to commissions paid. A person should therefore not purchase a commodity option unless they are able to sustain such a loss. In other words, money used to purchase options should be risk capital.
While option purchasers pay the full premium up front and are not required to pay additional margin, option grantors or sellers may be required to deposit additional margin if the market moves against them (a market price rise in the case of the call option grantor and a market price decline in the case of a put option grantor). A person should not, therefore, grant a commodity option unless they are able to meet such additional calls for margin and, in such circumstances, to sustain a very large financial loss.
