Markets for Futures and Options on Commodities and Forex

Markets for Futures and Options on Commodities and Forex

Futures and options trading have become more popular over the past few years. Day traders are going all out to try to make it big in this high-risk trading sector, driven by the convenience of internet access to continuously updated data. Trading these markets is now as easy and quick for individuals as it is for huge corporations. 

Foreign currency (Forex) and commodity futures and options trading is not a fit for all. A company's value and price might fluctuate wildly due to the complexity and risk involved in this industry. Prior to making any financial commitments to futures trading, option contracts, or foreign exchange, you should:

Determine how much you are willing to lose beyond your initial investment by taking into account your level of expertise, your trading objectives, and your available financial resources.

Before you put your money into commodity futures or option contracts, make sure you understand what you're getting into and what your responsibilities are.

Carefully examine the risk disclosure materials that your broker is obligated to provide you with in order to comprehend your exposure to risk and the features of trading.

When in doubt, know who to ask or speak with.

Do not open an account until you have asked additional questions and gathered additional information.

A futures and option contract for a commodity:

Two parties can enter into a legally enforceable agreement to purchase or sell a certain financial instrument or commodity on a specified exchange for a predetermined price and quantity at a later date through a futures contract. When entering into a futures contract, the buyer and seller will agree on a price for the goods today, with delivery or payment scheduled for a future date and time called the "settlement date." While the material may be physically delivered as part of the contract's fulfillment, the majority of futures contracts are "offset" or closed out before delivery even happens.

The buyer pays a market-determined price, called a "premium," and then has the right (but not the responsibility) to exercise his option within a set time period according to a legally binding agreement called an option on a commodity futures contract. Upon exercising the option, the individual will be considered to have engaged in a futures transaction at a predetermined price called the "strike price." "Options on the physical asset" describe situations when the right to purchase or sell the underlying asset is conferred via an option.

It is illegal for an individual to engage in the direct trading of futures contracts or options on futures contracts in the US. Trading on your behalf requires an individual or company. An individual or business must typically be registered with the Commodity Futures Trading Commission in order to trade on your behalf as a client.

There are two main types of trading accounts:

Individual Account. You are the only one whose trades are executed on an individual account. A "discretionary" or "non-discretionary" account setup is possible for an individual's account. With a "non-discretionary" account, you'll have complete control over your trades, and the broker will need your explicit permission to make any moves. When you open an individual "discretionary" account with a broker, you are essentially giving them (or another third party) the authority to make trades on your behalf.

An introducing broker or a Futures Commission merchant that has met the requirements can open an account on your behalf. It is possible for an introducing broker to take your orders and pass them on to a Futures Commission merchant they are working with. The Futures Commission Merchant is the one you deal with directly for making deposits. You can delegate trading authority to a Futures Commission merchant, an introducing broker, or a commodity trading advisor in an individual discretionary account. These individuals can act on your behalf in making trading choices.

Asset Pool. One more way to trade commodities is by joining a "commodity pool." Thus, you are buying a piece of the pool rather than an individual's stake, and transactions are made on behalf of the pool rather than its members. Everyone in the pool gets a cut of the profits or losses.

Get in touch with your broker as soon as possible if you're having trouble with your commodity futures or option account. In the event that that fails, alternative methods of conflict resolution are available to you: (1) the CFTC Reparations program; (2) arbitration supported by industry; or (3) action in court. When deciding on a course of action, it's wise to think about how much it will cost, how long it will take, and whether you'll need legal representation. Contact the CFTC's Office of Proceedings at (202) 418-5250 for further details on dispute resolution.

"Before You Trade" Checklist: 

Inspect that you possess:

Have you determined your long-term financial objectives, taking into account your tolerance for loss and risk?

Have you thought about how much guidance you would need from a trading advisor when making trades?

Have you verified the advisor's or pool's registration status and disciplinary record with the National Futures Association?

I got the disclosure document, read it cover to cover, and decided to open an account.

Completely grasped the information provided in the disclosure document, which included the fees, loss possibility, withdrawal rights, and the "break-even analysis?"

If something is unclear to you, do not hesitate to ask for clarification. Keep in mind that this is your money; you should be aware of its whereabouts.