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Trading in Commodity Futures and Options

Most of the participants in the futures and options markets are commercial and institutional users of the commodities they trade. For example, a company or individual who holds an asset such as coffee, corn, soybeans, U.S. Treasury bonds, or a portfolio of stocks, wants the value of that asset to increase. That person also wants to limit, if possible, any loss in value. The company or individual may use the commodity markets to take an opposite position that can minimize the risk of financial loss from holding those assets when and if their price changes. This is called "hedging."

Other participants are speculators who hope to profit from changes in the price of the futures contract. A speculator buying a futures contract or call option, or selling a put option, hopes to profit from rising prices, while a speculator selling a futures contract or call option, or buying a put option, hopes to profit from declining prices. Because, unlike a hedger, a speculator does not own the underlying commodity, the components of the underlying index, or other product, losses in the futures market are not offset by gains in the cash market, and speculators can lose substantial amounts.

Individuals do participate in the market. An individual who owns or runs a business might participate as a hedger. Or, an individual with a substantial and diversified portfolio of investments might speculate using futures or options contracts. Individual investors should also have adequate resources to absorb the significant losses that can occur in futures and option trading.

Trading commodity futures and options is not for everyone. It is a volatile, complex, and risky business. Before you invest any money in futures or option contracts, you should:

  1. Consider your financial experience, goals, and financial resources and know how much you can afford to lose above and beyond your initial payment.
  2. Understand commodity futures and option contracts and your obligations before entering into those contracts.
  3. Understand your exposure to risk and other aspects of trading by thoroughly reviewing the risk disclosure documents your broker is required to give you.
  4. Know whom to contact if you have a problem or question.

Source: http://www.cftc.gov/opa/brochures/opafutures.htm

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