1. What exactly is an option?

There is government-regulated exchange trading in two types of options on futures contracts, known as call options and put options.  Which one to consider investing in will depend entirely on your price expectations.  That is, on whether you expect the price of a particular commodity to go up or whether you expect it to go down.

Call option.  Purchasing a call option gives you a specific locked-in price at which you have the right - but not the obligation - to assume a long position in  a commodity that you expect to increase in value.  Thus, if you look for, say, the price of crude oil to go up, you'd buy a crude oil call option.

Put option.  Purchasing a put gives you a specific locked-in price at which you have the right - but not the obligation - to assume a short position in a commodity that you expect to decrease in value.  Thus, if you look for the price of crude oil to go down, you'd buy a crude oil put option.  One easy way to remember which is which is to think of the terms as "call up"' and "put down"'. Buying a call is a way to profit if prices go up. Buying a  put is a way to profit if prices go down.

If and when the market price of the commodity moves in the direction you anticipated, this will be reflected on a day-by-day basis in the value of your option rights. The more valuable your option rights become, over and above what you paid for them (including transaction costs), the larger your profit will be when you decide to sell or exercise the option.

2. What is my maximum risk if I buy an option?

The nature and amount of downside risk is a good first question to ask about any investment you may be considering.  In the case of options, the maximum risk is that you could potentially lose the money - known as the premium - which you invested to purchase that particular option. And, of course, you can lose the brokerage and transaction costs involved in making the investment. There can be no absolute assurance that any given option will become worthwhile to sell or exercise. Profitability depends on whether the price movement you anticipate occurs during the life of the option. Note too, if you exercise and convert to a futures contract, your risk is again unlimited until you offset that position.

3. Doesn't this make options a risky investment?

It makes options an inappropriate investment for some people.  This is why your broker will ask you questions that may seem somewhat personal about your financial situation and objectives and will require that you acknowledge reading and understand a Risk Disclosure document.  Money needed for family living, insurance protection, and basic savings programs obviously should never be committed to any form of investment that involves significant risk, regardless of the opportunity for profit.

4. Why have options on futures become such an increasingly popular investment?

Buying options make it possible to realize a potentially substantial profit - often in a short period of time - with a relatively small investment and with a known and limited risk.  Under no circumstances can the loss exceed the cost of purchasing the option, unless exercised into a futures contract.  Other advantages include:

· The greater leverage inherent in options.
· The liquidity provided by established competitive option markets.
· Investment diversification.
· The flexibility to respond rapidly to market opportunities.
· The ability to follow the value of your investment on a day-to-day basis.
· The staying power to weather temporary price setbacks without incurring additional risk or costs.
· Freedom from the margin calls that many other investments are subject to.
· Strict federal and industry regulation.
· The opportunity to realize profits during periods of declining prices as well as during periods of rising prices.

5. Other than "call" and "put" what terms do I need to be familiar with?

Just a couple.  You should know what is meant by an option's "premium" and its "strike price"'.

Premium.  Used in connection with options, premium has the same meaning as when used in connection with insurance.  It's the price (cost) that you pay to buy a given option. (See question 11 for an explanation of how option premiums are determined).

Strike Price.  This is the specific dollars and cents price at which the option gives you the right to assume a long futures position in the case of a call, or a short futures position in the case of a put. The strike price is stated in the option.

Example: If a call option gives you the right to buy 1,000 barrels (42,000 gallons) of crude oil at a price of $25.00 a barrel, 25 is the strike price. At any given time, there is likely to be trading in options with a number of different strike prices.

When you buy a call, you hope the market price of the commodity will move above the option's strike price by an amount greater than the cost of the option, thereby causing the option to become profitable.  When you buy a put, you hope that the market price of the commodity will decline below the option's strike price by an amount greater than the cost of the option.

6. How are profits realized in option investing?

Generally by instructing your broker to sell your appreciated option rights to someone who may have an interest in exercising them. The sale will be accomplished on the trading floor of the exchange (the same exchange where the option was bought) and your net profit will be the difference between the price that you originally paid for the option and the higher price that you are able to sell it for, less brokerage and transaction expenses. The mechanics are no more complicated than, for example, selling shares of common stock that have appreciated. An alternative to selling a profitable option is to exercise the option rights yourself.  Doing this, however, would result in your actually acquiring a position in the futures market, which could require an additional investment on your part and involves significantly greater risk.  Most investors therefore prefer to realize their profits by simply selling the option at its increased value.

7. As an example, suppose I buy an option to purchase one contract (1,000 barrels) of crude oil at a strike price of $25/ barrel and the price of crude oil goes to $30/barrel, what's my profit?

If crude oil climbs to $30 a barrel at expiration, your call option with a $25 strike price will have a value of $5,000 - the $5 per barrel price increase times 1,000 gallons. The profit will depend on what you paid for the option to start with. If your total costs (premium plus brokerage commission and fees) were, say, $1000, then your profit will be $4,000, the difference between the $1000 you paid for the option and the $5,000 you can now sell it for. As mentioned, the same broker who handled the purchase can handle the sale. (Question 17 has more information about selling a profitable option.)

Illustration of profit or loss on a 1,000 gallon crude oil (coded "CL") call option if option strike price is $25 a barrel and the cost of purchasing the option was $1000 ($1 per gallon):

If CL futures      Value of       Cost of option    Your profit or loss
at exp. are:      option at exp.                                  at exp.

$25 or less            $0                  $1000             $1000 loss
$26                       $1000            $1000             $0 even
$27                       $2000            $1000             $1000 profit
$28                       $3000            $1000             $2000 profit
$29                       $4000            $1000             $3000 profit
$30                       $5000            $1000             $4000 profit
$31                       $6000            $1000             $5000 profit

8. How large is my profit potential when I buy an option?

There is no upper limit on the opportunity for profit.  The greater the price movement - provided it's in the direction you anticipated and provided it occurs during the life of the option - the larger the profit.  As previously indicated, it is the combination of limited risk and unlimited opportunity that is a principal attraction of options as an investment vehicle.

9. At the present time, what options can be purchased?

The list of exchange-traded options has grown rapidly and now includes a broad range of agricultural commodities, precious metals, energy products, financial instruments, and foreign currencies.  The following is a partial listing by category.

 · Agricultural Commodities:
Corn, Wheat, Soybeans, Cotton, Lumber, Coffee, Sugar, Cocoa, Orange Juice, Cattle, Pork Bellies, Hogs, and many more.
(These can often provide a leading economic indicator of inflation or deflation.)

· Metals:
Gold, Silver, Platinum, Palladium, and Copper
(Prices often rise sharply during periods of inflation and decline during recessions; they can be volatile in either direction in times of economic uncertainty.)

· Energy products:
Crude Oil, Heating Oil, Unleaded Gasoline, and Natural Gas
(As history has shown, prices can move rapidly and substantially in response to political and economic events.)

· Interest rates:
U.S. Treasury Bonds, U.S. Treasury Notes, U.S. Treasury Bills, Municipal Bond Index, and Eurodollars
(Even relatively small changes in interest rates can result in major changes in the market value of fixed income investments.)

· Common stock indexes:
S&P 500 (Standard & Poor's Index of 500 common stocks), NASDAQ 100 Index, and New York Stock Exchange Composite Index
(Indexes reflect increases and decreases in the overall market value of common stocks.)

· Currencies:
British Pound, German Mark, Swiss Franc, Japanese Yen, Canadian Dollar, and U.S. Dollar Index
(Trade balances, relative economic strength, and government policies can influence the value of foreign currencies in relation to the dollar.)

There are many, many more futures markets than can be listed here. If you are interested in whether a market exists for a product you are interested in, ask your broker. Also, some markets are much more liquid or volatile than others. Your broker should be able to help guide your decision making depending on your personal investment objectives.

10. How long is the life of an option?

There is normally trading in options that have different lengths of time remaining until expiration - from less than a month to twelve or more months. The choice is yours. This flexibility makes it possible to select whichever option best coincides with when you expect a given price movement to occur.

Example: Buying an option that expires in October allows three more months for the expected price change to take place than buying an option that expires in July.

Purchasing a longer option increases the premium cost of the option somewhat (see question 12) but, as with most things in life, it's usually best to allow at least a little extra time for an expected event to occur!  Don't hesitate to seek your broker's assistance in deciding how long an option it would be advisable to consider purchasing.

11. When I buy an option, how is the premium cost arrived at?

As mentioned, the premium refers to the price you pay to buy an option. it also refers to the price you receive if and when you subsequently sell the option. Like prices on the trading floor of a stock exchange or futures exchange, option premiums are arrived at through open competition between brokers representing buyers and sellers. Option markets are thus quite efficient supply and demand marketplaces.  Trading is subject to the rules of the exchange and is closely regulated by the Commodity Futures Trading Commission (CFTC), a federal agency. Firms that deal in options are subject to CFTC regulation and also to regulation by the National Futures Association (NFA), the industry's congressionally authorized self-regulatory organization.

12. What major factors influence the premium cost of a particular option?

There are four major factors and three of them have already been mentioned: the current trading price of the underlying commodity futures, the amount of time remaining until expiration, and the options strike price.  A fourth variable is the volatility of the markets.

Time to expiration
All else being equal, an option with more time until expiration commands a larger premium than an option with less time until expiration. The longer option provides more time for your price expectations to be realized.

Strike price
in the case of call options, it stands to reason that the most valuable options are those which convey the right to buy at a low price. Thus, all else being equal, a call option with a low strike price costs more to purchase than a call option with a high strike price. It's just the opposite for put options. The most valuable puts are those that have a high strike price.

Volatility
Again, all else being equal, option premiums are usually higher when the markets are volatile. Volatile markets are considered more likely to produce the price movements that can make options profitable to own.

13. Exactly how much does the price of the commodity have to change in order for me to realize a profit on the option?

Fortunately, this important calculation is also a simple calculation - a matter of addition or subtraction, depending on whether you are buying a call option or a put option.  The only two factors involved are the cost of the option and the option's strike price.

Calls - To realize a profit on a call, the market price of the commodity must move above the option strike price by an amount greater than your costs (costs include the premium invested to buy the option, brokerage commission, and any other applicable transaction costs).

Example: With crude oil at $23/barrel, and in anticipation of rising prices, you invest $1000 (the equivalent of $1/barrel) to buy a 1,000 gallon CL call option with a strike price of $25 a gallon. For the option to become profitable at expiration, the price of crude oil must climb above $26. For each $1/barrel it increases above that amount, your profit is $1000.

Puts - To realize a profit on a put, the market price of the commodity must decline below the option strike price by an amount greater than your costs.

Example: With crude oil at $27/barrel, and in anticipation of declining prices, you invest $1000 (the equivalent of $1/barrel) to buy a 1,000 gallon CL put option with a strike price of $25 per barrel. For the option to become profitable at expiration, the price of crude oil must decline below $24.  For each $1/barrel it declines below that amount, your profit is $1000.

14. It's often said a major advantage of options is "leverage".  What does this mean?

Greater leverage, which options provide, means that even a small favorable movement in the underlying commodity price can yield a high percentage rate of return on your investment.

Example: You've invested $1000 to buy a three-month crude oil call option with a strike price of $25 and the price of crude has climbed to $30. The option that cost only $1000 can now be sold for $5000. The net profit of $4000 represents a quadrupling of your investment in three months. Stated another way, it took only a 20% increase in the price of crude oil (from $25 to $30) to give you a 400% return on your $1000 investment. That's leverage!

15. But can't leverage work both ways, against as well as for you?

That's true, the potential for a high percentage return on your investment should be weighed against the risk that - if the option does not become worthwhile to sell or exercise by expiration - you would lose your entire investment in that particular option.  Even so, buying an option can involve much less dollar risk than the alternative of owning the actual commodity.

Example: At the same time you spent $1000 to buy the 1000 gallon crude oil call option with a $25 strike price, your wealthy neighbor plunked down $25,000 to purchase 1000 gallons of physical crude oil at $25. If the price of crude drops to, say, $20 at expiration, your option will be worthless and you will have lost $1000, 100% of your investment. Your neighbor, if he decides to sell the oil, will incur only a 20% loss, but he will be out $5000 - compared with your $1000 loss.

16. Once I've bought an option, will there be a continuing market for that option?

There's generally an active market in outstanding options right up to the day of expiration. However, if an option is no longer deemed to have much, if any, chance of ever becoming worthwhile to exercise, there may not currently be any viable market for it.

17. Suppose an option I've bought very quickly becomes profitable.  Do I have to wait until the expiration date to sell it?

Absolutely not. When to sell such an option - and take your profits - is entirely up to you.  On the one hand, continuing to hold the option until nearer its expiration date could result in your realizing an even larger profit.

But, on the other hand, an unexpected adverse price movement could result in a reduction in the value of the option.  Deciding when to sell a profitable option is thus a "bird-in-the-hand' type of decision.

A somewhat technical point to bear in mind in making the decision is that in addition to whatever a given option would currently be worth to exercise, options that haven't yet expired may also have what's called 'time value'.

Example: With crude at $30 a gallon, a 1000 gallon crude oil call option with a strike price of $25 will be worth $5000 to exercise.  But if it still has time remaining until expiration, you may be able to sell it for more than $5000 - the difference being its time value.

Specifically, time value is whatever amount other investors in the marketplace are willing to pay you - over and above what the option is currently worth to exercise - as additional compensation for giving up your option rights prior to expiration.  This will be reflected in the option premium.  Your broker can explain in greater detail.

18. Can I sell an option even if it isn't currently worthwhile to exercise?

The answer is yes if the option still has time remaining until expiration and if there is still active trading in that particular option. Whether the sale results in a profit or a loss will depend - as with any option - on whether you sell it for more or for less than you paid for it.

A favorable change in the price outlook or an increase in market volatility can make an option suddenly more attractive to other investors. If this results in an increase in its premium value, you may be able to sell the option at a profit even though it isn't yet worthwhile to exercise.

In other situations, if prices so far haven't moved the way you thought they would, and if you no longer want to own the option, selling it prior to expiration can provide a way to recover some part of your initial investment Such a decision should not be made hastily, however. The fact that you have until expiration for your original price expectations to be realized can give you greater "staying power" than other investors may enjoy.

It is this "staying power' - the ability to weather what may prove to be only a temporary price setback - that is one of the principal advantages of investing in options. No matter how large the adverse price movement in the option you own, your maximum loss is still limited to the cost of the option.

19. Can I follow an option's current market value on a regular basis?

Yes, very easily. Options on futures contracts are traded on regulated exchanges that have continuous electronic quotation systems. Business periodicals such as the Wall Street Journal, Investors Business Daily, and many major newspapers report actively traded futures prices and option premiums daily.

Or you can phone your broker who has computer access to current option premiums. The opportunity to know at all times what your investment is worth is another attractive feature of exchange-traded options.

20. How much should I know about the underlying commodity in order to consider investing in options?

The reason for buying an option is because you have an opinion about the probable price movement of a particular commodity.  The opinion can be derived from your own knowledge or, as is the case with most investors, by dealing with a brokerage firm in whose research and analytical abilities you have confidence.

21. When I purchase an option, who is the party on the other side of the transaction?

More than likely, it's an individual or institution who engages in a highly speculative area of investment activity known as option "writing". Such investors are also sometimes called option "grantors". They stand to make money if - and only if - your option rights at expiration are worth less than you paid for them.

In contrast to the more limited risk that's involved in buying options, writing options involves potentially unlimited risks, may require substantial margin deposits, and is inappropriate for most people. Do not consider it without thoroughly discussing the costs and risks with your broker.

22. Who assures payment on exchange-traded options contracts?

When an option that you've purchased becomes profitable, the funds needed to pay you are collected (from the option writer on the other side of the transaction) on a daily basis. This is accomplished through the brokerage firms and the clearing organizations of the exchanges where options are traded.

23. What brokerage commissions are involved in buying options?

Brokerage firms differ in the services they provide, in their success in helping clients identify potentially profitable investment opportunities, and in the commissions which they charge.  Provided commissions are stated in a clear and forthright manner, each firm can set its own rates - the same as firms in the securities industry do.  Nevertheless, commissions are one variable in an option's profit equation and you should be satisfied that they are fair and reasonable in relation to the services and advice being provided.

24. What place do options have in an overall investment program?

To start with, it should be said again that options have no place at all unless some portion of your total investment capital can legitimately be considered risk capital - money you can afford to take calculated risks with in pursuit of a correspondingly larger profit potential. If that requirement is met, options might very well have a worthwhile place in your total investment program.

25. How do options compare with other investments that involve a similar risk and reward profile?

Obviously, no two or more investments have exactly the same risk-reward characteristics. One characteristic of options is that, to be profitable, the anticipated price movement has to occur within the time frame of the particular option you've selected.  Having said this, however, options have a number of distinct advantages in addition to their limited risk. These include:

The opportunity to profit whether the price of a given commodity is expected to go up (by buying calls) or go down (by buying puts). This advantage should be readily apparent to investors who have had recent and frequent reminders that prices in a dynamic economy can move sharply downward as well as sharply upward.  Option profits can be realized in both market environments. Indeed, as easily in one as in the other.

Diversification - Because of the leverage options provide, a given sum of investment capital can more readily be divided among a number of different market sectors simultaneously - such as oil, metals, and livestock. This diversification can improve your likelihood of  "being in the right place at the right time".

Options may be the least expensive way to acquire an interest in just about any of the commodities on which options are available. For example, buying call options in anticipation of rising energy or livestock prices may be considerably less costly than the alternative of, say, purchasing an interest in oil wells or a cattle feedlot.

26. Investment experts mention the "positioning" advantage of options.  What exactly do they mean?

That's probably the best question with which to conclude this discussion because it's of key importance.  It has to do with the well-known fact that major price movements - the kind that can make options especially profitable to own - frequently occur in response to specific economic or political events that may be anticipated but that can't be predicted with absolute certainty. Yet once these events do occur, there may be little or no opportunity for small investors to participate in the resulting price movement.

Example: A decision yea or nay by the Federal Reserve on some important issue can have a sudden and dramatic impact on interest rates, gold prices, the stock market, and currency values.  An action by oil ministers or an escalation of hostilities can send oil prices soaring or nosediving. An announcement of new trade rules or subsidies can trigger a sharp movement in prices of agricultural commodities.

A principal attraction of options - some say the principal attraction - is that they provide a way to position yourself to profit on a highly leveraged, ground-floor basis if and when the anticipated events and price movements occur.  And to do so with the knowledge that the most you can lose if you are wrong is the cost of the options.

Let's face it - we'd all like to trade the markets by getting in at the lows and getting out at the highs. Even if you're not particularly interested in speculating on market trends, surely you'd like to receive the highest price possible for the products you sell. But since none of us has a perfect crystal ball, we can't predict the future with absolute certainty. And that's why many have turned to options. Options allow the investor or savvy business planner to have their cake and eat it too.

Regardless of your investment or trading goals, you will like options because there are so many things you can do with them.  Spreads, straddles, strangles - ask your broker about some of these potentially risk-limiting tactics. Depending on your comfort level or business needs, there's an option strategy out there for you.

Whether you will chose to trade futures or options on futures, we at Fidelity Global Futures will guarantee you a professional, well organized support team. At our firm we can provide you with both technical and fundamental analysis on any given commodity or index you wish to trade. Our brokers are trained to provide you with the finest service the industry has to offer.

27. How do I open a trading account with Fidelity Global Futures?

If you would like the necessary account forms delivered to you, please call us at the toll-free number below, or email your your name, phone number and mailing address to:

Account forms are also now available to immediately download in Adobe .pdf format - go to the left side of this page and use the link button "OPEN ACCOUNT".

Unlike some other brokerage firms that can take over a month to set up an account, once funds are verified we promise to do everything in our power to have your account up and ready to trade within a few days!  If you choose to wire in your funds, then you may be ready to trade the very same day. If you are not satisfied for any reason, you can close your account just as fast as you opened it.

28. What if I don't know anything about trading?  Will someone be available to help me?

First, we'll have a conversation and make sure that futures or options trading is something that is right for you and your investment goals. This type of trading is not suitable for everyone. If we mutually agree that futures or options trading is appropriate for you, then we will train you on a "broker-assisted" basis. Your broker will be contacting you when market conditions are right for a trade. But remember, you the customer are authorizing and placing each and every trade through your broker. You are the boss, and if you are not comfortable with a broker's recommendation, just say so.

Every day, if you wish, your broker can email you the synopsis of what is going on relative to that trade and the day's current market conditions. You will understand the reasoning for the trade, and what to expect if the market goes up, down, or sideways. You will understand the complete plan - from the day the trade is initiated until it becomes a profit or a loss.  It will be like having a personal guide to the markets.

You will understand the methodology, rationale, and decision making process as to why you should execute a specific trade.  Once you have mastered the basics more complex strategies will be taught to you. One of the biggest mistakes people make is picking the wrong trade or having the wrong timing.  Obviously if you attempt to put on a trade that does not meet your investment goals you are working from a big disadvantage right from the start.

Every opportunity will be made to communicate information to you about current or possible trades, so that you can learn as much as possible.

29. Why don't other brokers offer this level of service?

Many "brokers" are simply order takers, or even worse, telemarketers. Fidelity Global Futures employs only Series 3 licensed and registered professionals.

Markets may move up or down, with us or against us. Regardless, we promise to always offer only courteous and professional service, for beginners as well as seasoned traders. It's as simple as that.

In closing, we at Fidelity Global Futures would like to thank you for exploring our website, and hopefully, choosing us as your broker. Welcome to the exciting world of commodities - Welcome to FGF!