One of the best all-purpose investment rules anyone can follow is this: Never invest your money unless your understanding of the risks is as good as your understanding of the opportunities. Options on futures contracts are a relative new and increasingly popular type of investments. They have been competitively traded on regulated futures exchanges only since the early 1980′s. Yet they now account for a significant portion of the total volume of futures trading.

The principal attraction of options-known as call options and put options- is that they offer an option buyer the potential for substantial profit while limiting the options buyer’s risk to the up front cost of the options (known as the “premium”) plus commissions and other transaction costs. Despite the pre-defined risks for the buyer, options are not an appropriate investment for many people.

The fact that you can and may lose your entire investment in a short period of time hardly qualifies them as a low risk investment. Indeed, options should be regarded as a highly speculative investment. This doesn’t mean you should not consider options as an investment; some people have realized large profits by purchasing options when significant price movements are correctly anticipated. Moreover, it’s possible that gains realized on even a few profitable options could more than make up for losses incurred on other, unprofitable options.

As with any type of investment, it is important to be certain your decision is an informed decision. The following information is from the National Futures Association, a self regulatory organization of the futures industry, has been prepared to provide an introduction to options on futures contracts, how they work and the opportunities and risks associated with their purchase.

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