Risk of Commodity Futures Trading
 
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The Risk Factor Between Puts And Calls



Do the risks vary between puts and calls?

The purchaser of an option (known as a "long" call or being "long" a put) can do the following with an option position.

The purchaser may "exercise" the option if it is profitable, or allow the option to expire if it is not profitable.

The exercise of an option by someone who is "long" results either in a cash settlement or in the purchaser acquiring the underlying interest.

If the option is on a futures contract, the purchaser will acquire a futures position with associated liabilities for margin (see the section, Futures, above).

If a purchased option expires worthless, you will suffer a total loss of your investment, which will consist of the option premium plus transaction costs.

If you are contemplating purchasing "deep-out-of-the-money" options, you should be aware that the chance of such options becoming profitable ordinarily is remote.

Selling, or shorting, an option generally entails considerably greater risk than purchasing options.

Although the premium received by the seller is fixed, the seller may sustain a loss well in excess of that amount.

The seller will be liable for additional margin to maintain the position if the market moves unfavorably.

The seller will also be exposed to the risk that the purchaser will exercise the option, obligating the seller to either settle the option in cash or to acquire and deliver the underlying interest.

If the position is "covered" by the seller holding a corresponding position in the underlying interest or a future or another option, the risk of loss may be reduced, but the loss may still exceed the premium received.

If the option is not covered, the risk of loss can be unlimited.

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