Options Risk Disclosure

Because of the volatile nature of the commodities markets, the purchase and granting of commodity options involve a high degree of risk. Commodity transactions are not suitable for many members of the public. Such transactions should be entered into only by persons who have read and understood this 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 this disclosure statement.

Both the purchaser and the grantor should know that the option if exercised, results in the establishment of a futures contract (an “option on a futures contract”).

Both the purchaser and the grantor should know whether the particular option in which they contemplate trading is subject to a “stock-style” or “futures-style” system of margining. Under a stock-style margining system, a purchaser is required to pay the full purchase price of the option at the initiation of the transaction. The purchaser has no further obligation on the option position. Under a futures-style margining system, the purchaser deposits initial margin and may be required to deposit additional margin if the market moves against the option position. The purchaser's total settlement variation margin obligation over the life of the option, however, will not exceed the original option premium, although some individual payment obligations and/or risk margin requirements may at times exceed the original option premium. If the purchaser or grantor does not understand how options are margined under a stock-style or futures-style margining system, he or she should request an explanation from the futures commission merchant (“fcm”) or introducing broker (“ib”).

A person should not purchase any commodity option unless he or she is able to sustain a total loss of the premium and transaction costs of purchasing the option. A person should not grant any commodity option unless he or she is able to meet additional calls for margin when the market moves against his or her position and, in such circumstances, to sustain a very large financial loss.

A person who purchases an option subject to stock-style margining should be aware that, in order to realize any value from the option, it will be necessary either to offset the option position or to exercise the option. Options subject to futures-style margining are marked to market, and gains and losses are paid and collected daily. If an option purchaser does not understand how to offset or exercise an option, the purchaser should request an explanation from the fcm or ib. Customers should be aware that in a number of circumstances, some of which will be described in this disclosure statement, it may be difficult or impossible to offset an existing option position on an exchange.

The grantor of an option should be aware that, in most cases, a commodity option may be exercised at any time from the time it is granted until it expires. The purchaser of an option should be aware that some option contracts may provide only a limited period of time for exercise of the option.

The purchaser of a put or call subject to stock-style or futures-style margining is subject to the risk of losing the entire purchase price of the option - that is, the premium charged for the option plus all transaction costs.

The commodity futures trading commission requires that all customers receive and acknowledge receipt of a copy of this disclosure statement but does not intend this statement as a recommendation or endorsement of exchange-traded commodity options.

1. Some of the risks of option trading.

   Specific market movements of the underlying future cannot be predicted accurately.

   The grantor of a call option who does not have a long position in the underlying futures contract is subject to risk of loss should the price of the underlying futures contract be higher than the strike price upon exercise or expiration of the option by an amount greater than the premium received for granting the call option.

   The grantor of a call option who has a long position in the underlying futures contract is subject to the full risk of a decline in price of the underlying position reduced by the premium received for granting the call. In exchange for the premium received for granting a call option, the option grantor gives up all of the potential gain resulting from an increase in the price of the underlying futures contract above the option strike price upon exercise or expiration of the option.

   The grantor of a put option who does not have a short position in the underlying futures contract is subject to risk of loss should the price of the underlying futures contract decrease below the strike price upon exercise or expiration of the option by an amount in excess of the premium received for granting the put option.

   The grantor of a put option on a futures contract who has a short position in the underlying futures contract is subject to the full risk of a rise in the price in the underlying position reduced by the premium received for granting the put. In exchange for the premium received for granting a put option on a futures contract, the option grantor gives up all of the potential gain resulting from a decrease in the price of the underlying futures contract below the option strike price upon exercise or expiration of the option.

2. Description of commodity options. Prior to entering into any transaction involving a commodity option, an individual should thoroughly understand the nature and type of option involved and the underlying futures contract. The futures commission merchant or introducing broker is required to provide, and the individual contemplating an option transaction should obtain:

   1. An identification of the futures contract underlying the option and which may be purchased or sold upon exercise of the option or, if applicable, whether exercise of the option will be settled in cash;
   2. The procedure for exercise of the option contract, including the expiration date and latest time on that date for exercise. (The latest time on an expiration date when an option may be exercised may vary; therefore, option market participants should ascertain from their futures commission merchant or their introducing broker the latest time the firm accepts exercise instructions with respect to a particular option.);
   3. A description of the purchase price of the option including the premium, commissions, costs, fees and other charges. (Since commissions and other charges may vary widely among futures commission merchants and among introducing brokers, option customers may find it advisable to consult more than one firm when opening an option account.);
   4. A description of all costs in addition to the purchase price which may be incurred if the commodity option is exercised, including the amount of commissions (whether termed sales commissions or otherwise), storage, interest, and all similar fees and charges which may be incurred;
   5. An explanation and understanding of the option margining system;
   6. A clear explanation and understanding of any clauses in the option contract and of any items included in the option contract explicitly or by reference which might affect the customer’s obligations under the contract. This would include any policy of the futures commission merchant or the introducing broker or rule of the exchange on which the option is traded that might affect the customer’s ability to fulfill the option contract or to offset the option position in a closing purchase or closing sale transaction (for example, due to unforeseen circumstances that require suspension or termination of trading); and
   7. If applicable, a description of the effect upon the value of the option position that could result from limit moves in the underlying futures contract.

3. The mechanics of option trading. Before entering into any exchange-traded option transaction, an individual should obtain a description of how commodity options are traded.

   Option customers should clearly understand that there is no guarantee that option positions may be offset by either a closing purchase or closing sale transaction on an exchange. In this circumstance, option grantors could be subject to the full risk of their positions until the option position expires, and the purchaser of a profitable option might have to exercise the option to realize a profit.

   For an option on a futures contract, an individual should clearly understand the relationship between exchange rules governing option transactions and exchange rules governing the underlying futures contract. For example, an individual should understand what action, if any, the exchange will take in the option market if trading in the underlying futures market is restricted or the futures prices have made a “limit move.”

   The individual should understand that the option may not be subject to daily price fluctuation limits while the underlying futures may have such limits, and, as a result, normal pricing relationships between options and the underlying future may not exist when the future is trading at its price limit. Also, underlying futures positions resulting from exercise of options may not be capable of being offset if the underlying future is at a price limit.

4. Margin requirements. An individual should know and understand whether the option he or she is contemplating trading is subject to a stock-style or futures-style system of margining. Stock-style margining requires the purchaser to pay the full option premium at the time of purchase. The purchaser has no further financial obligations, and the risk of loss is limited to the purchase price and transaction costs. Futures-style margining requires the purchaser to pay initial margin only at the time of purchase. The option position is marked to market, and gains and losses are collected and paid daily. The purchaser's risk of loss is limited to the initial option premium and transaction costs

   An individual granting options under either a stock-style or futures-style system of margining should understand that he or she may be required to pay additional margin in the case of adverse market movements.

5. Profit potential of an option position. An option customer should carefully calculate the price which the underlying futures contract would have to reach for the option position to become profitable. Under a stock-style margining system, this price would include the amount by which the underlying futures contract would have to rise above or fall below the strike price to cover the sum of the premium and all other costs incurred in entering into and exercising or closing (offsetting) the commodity option position. Under a future-style margining system, option positions would be marked to market, and gains and losses would be paid and collected daily, and an option position would become profitable once the variation margin collected exceeded the cost of entering the contract position.

   Also, an option customer should be aware of the risk that the futures price prevailing at the opening of the next trading day may be substantially different from the futures price which prevailed when the option was exercised.

6. Deep-out-of-the-money options. A person contemplating purchasing a deep-out-of-the-money option (that is, an option with a strike price significantly above, in the case of a call, or significantly below, in the case of a put, the current price of the underlying futures contract) should be aware that the chance of such an option becoming profitable is ordinarily remote.

   On the other hand, a potential grantor of a deep-out-of-the-money option should be aware that such options normally provide small premiums while exposing the grantor to all of the potential losses described in section (1) of this disclosure statement.

7. Glossary of terms -
   1. Contract market. Any board of trade (exchange) located in the Domestic Exchange which has been designated by the Commodity Futures Trading Commission to list a futures contract or commodity option for trading.
   2. Exchange-traded option; put option; call option. The options discussed in this disclosure statement are limited to those which may be traded on a contract market. These options (subject to certain exceptions) give an option purchaser the right to buy in the case of a call option, or to sell in the case of a put option, a futures contract underlying the option at the stated strike price prior to the expiration date of the option. Each exchange-traded option is distinguished by the underlying futures contract, strike price, expiration date, and whether the option is a put or a call.
   3. Underlying futures contract. The futures contract which may be purchased or sold upon the exercise of an option on a futures contract.
   4. [Reserved]
   5. Class of options. A put or a call covering the same underlying futures contract.
   6. Series of options. Options of the same class having the same strike price and expiration date.
   7. Exercise price. See strike price.
   8. Expiration date. The last day when an option may be exercised.
   9. Premium. The amount agreed upon between the purchaser and seller for the purchase or sale of a commodity option.
   10. Strike price. The price at which a person may purchase or sell the underlying futures contract upon exercise of a commodity option. This term has the same meaning as the term “exercise price.”
   11. Short option position. See opening sale transaction.
   12. Long option position. See opening purchase transaction.
   13. Types of options transactions -
       1. Opening purchase transaction. A transaction in which an individual purchases an option and thereby obtains a long option position.
       2. Opening sale transaction. A transaction in which an individual grants an option and thereby obtains a short option position.
       3. Closing purchase transaction. A transaction in which an individual with a short option position liquidates the position. This is accomplished by a closing purchase transaction for an option of the same series as the option previously granted. Such a transaction may be referred to as an offset transaction.
       4. Closing sale transaction. A transaction in which an individual with a long option position liquidates the position. This is accomplished by a closing sale transaction for an option of the same series as the option previously purchased. Such a transaction may be referred to as an offset transaction.
   14. Purchase price. The total actual cost paid or to be paid, directly or indirectly, by a person to acquire a commodity option. This price includes all commissions and other fees, in addition to the option premium.
   15. Grantor, writer, seller. An individual who sells an option. Such a person is said to have a short position.
   16. Purchaser. An individual who buys an option. Such a person is said to have a long position.