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.
Chapter 1: The Vocabulary of
Options Trading
Chapter 2: The Arithmetic of
Option Premiums
Chapter 3: The Mechanics of
Buying and Writing Options
Chapter 4: A Pre-Investment Checklist
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Futures Research
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