Part Four: Pre-Investment Checklist

Take the time to check out any firm or individual that you don't know through previous experience or reputation. All firms and persons offering options on US futures contracts are required by law to be registered with the Commodity Futures Trading Commission (CFTC) and to be Members of the National Futures Association (NFA). You can do this quickly, easily and without cost by accessing the NFA's Background Affiliation Status Information Center (BASIC), located at the NFA's website (www.nfa.futures.org). BASIC will provide you with the firm and/or individual's registration status, as well as any disciplinary actions taken by NFA, the CFTC or any US exchanges. This same information is also available by calling the 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 premium - 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 performance 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 expectation 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 exercise 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 potentially unlimited losses. And don't take 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 a investment opportunity than to be pushed into a decision you may later regret. And don't make an investment that is presented to you as the sure thing. They don't exist!

Always seek the advice of other person such as knowledgeable financial advisor, attorney or accountant before making any major investment decision.

Source: National Futures Association; published here with permission. This publication, Buying Options on Futures Contracts: A Guide to Uses and Risks, is the property of the National Futures Association.