Effect of “Leverage” or “Gearing”
Transactions in futures carry a high degree of risk. The amount of the Initial margin is small relative to the value of the futures contract so that transactions are ‘leveraged’ or ‘geared’. A relatively small market movement will have a proportionately larger impact on the funds you have deposited or will have to deposit: this may work against you as well as for you. You may sustain a total loss of initial margin funds and any additional funds deposited with the firm to maintain your position. If the market moves against your position or margin levels are increased, you may be called upon to pay substantial additional funds on short notice to maintain your position. If you fail to comply with a request for additional funds within the time prescribed, your position may be liquidated at a loss and you will be liable for any resulting deficit.
Risk-reducing orders or strategies
The placing of certain orders (e.g., “stop-loss” orders, where permitted under local law, or “stop-limit” orders) which are intended to limit losses to certain amounts may not be effective because market conditions may make it impossible to execute such orders. Strategies using combinations of positions, such as “spread” and “straddle” positions, may be as risky as taking simple “long” or “short” positions.
Variable degree of risk
Transactions in options carry a high degree of risk. Purchasers and sellers of options should familiarize themselves with the type of option (i.e., put or call) that they contemplate trading and the associated risks. You should calculate the extent to which the value of the options must increase for your position to become profitable, taking into account the premium and all transaction costs. The purchaser of options may offset or exercise the options or allow the options to expire. The exercise of an option results either in a cash settlement or in the purchaser acquiring or delivering the underlying interest. If the option is on a future, the purchaser will acquire a futures position with associated liabilities for margin (see the section on Futures above). If the purchased options expire 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 (“writing” or “granting”) 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 margins to maintain the position if the market moves unfavorably. The seller will also be exposed to the risk of the purchaser exercising the option and the seller will be obligated to either settle the option in cash or to acquire or deliver the underlying interest. If the option is on a future, the seller will acquire a position in a future with associated liabilities for margin (see the section on Futures above). If the option is “covered” by the seller holding a corresponding position in the underlying interest or a future or another option, the risk may be reduced. If the option is not covered, the risk of loss can be unlimited. Certain exchanges in some jurisdictions permit deferred payment of the option premium, exposing the purchaser to liability for margin payments not exceeding the amount of the premium. The purchaser is still subject to the risk of losing the premium and transaction costs. When the option is exercised or expires, the purchaser is responsible for any unpaid premium outstanding at that time. Additional commissions may apply when trading naked short options.
A spread is defined as the sale of one or more futures or options contracts and the purchase of one or more offsetting futures or options contracts. It should be recognized, though, that the loss from a spread can be as great as – or even greater than – that which might be incurred in having an outright futures or options position. An adverse widening or narrowing of the spread during a particular time period may exceed the change in the overall level of futures or option prices, and it is possible to experience losses on both of the futures or options contracts involved (that is, on both legs of the spread). In addition, spread trading increases transaction costs because the customers will be charged commissions on each leg of the spread.
This website may make certain references to the use of stop orders as means of limiting losses or protecting profits. Please note that there is no guarantee that any stop loss order will be executed at the stop price. Therefore, there can be no guarantee that placing a stop order will limit losses or protect profits. Accordingly, no representation is being made that the trading in customers’ accounts will be profitable or will not result in losses as the result of placing stop orders.
Authorization for Trades by Text
Orders transmitted via text messaging are taken on a “not held” basis. The customer’s text message is not a valid, executable order until DT confirms the trade and the Customer affirmatively acknowledges acceptance of the trade. If the Customer does not receive a prompt response from DT concerning the text message submission, it is the Customer’s affirmative obligation to contact DT immediately. DT assumes no responsibility for orders placed by text messaging. All texts sent to Customer from DT will be replied to by Customer only. DT is not responsible for text replies or trade instructions sent by any other individuals from the Customers phone or any other phone number other than the phone number associated with Customer’s account. There may be slippage in order execution between the time Customer texts a message and DT executes the order. Customers must check its trading statements for accuracy immediately upon receipt thereof. Any discrepancies or issues must be reported immediately to DT. Mobile phone carrier message and data rates may apply and are the sole responsibility of the Customer.
Additional risks common to futures and options
Terms and conditions of contracts
You should ask the firm with which you deal about the terms and conditions of the specific futures or options which you are trading and associated obligations (e.g., the circumstances under which you may become obligated to make or take delivery of the underlying interest of a futures contract and, in respect of options, expiration dates and restrictions on the time for exercise). Under certain circumstances, the specifications of outstanding contracts (including the exercise price of an option) may be modified by the exchange or clearing house to reflect changes in the underlying interest.
Suspension or restriction of trading and pricing relationships
“Market” conditions (e.g., illiquidity) and/or the operation of the rules of certain markets (e.g., the suspension of trading in any contract or contract month because of price limits or “circuit breakers”) may increase the risk of loss by making it difficult or impossible to effect transactions or liquidate/offset positions. If you have sold options, this may increase the risk of loss.
Further, normal pricing relationships between the underlying interest and the future, and the underlying interest and the option may not exist. This can occur when, for example, the futures contract underlying the option is subject to price limits while the option is not. The absence of an underlying reference price may make it difficult to judge “fair” value.
Deposited cash and property
You should familiarize yourself with the protections afforded money or other property you deposit for domestic and foreign transactions, particularly in the event of a firm insolvency or bankruptcy. The extent to which you may recover your money or property may be governed by specified legislation of local rules. In some jurisdictions, the property that had been specifically identifiable as your own will be pro-rated in the same manner as cash for purposes of distribution in the event of a shortfall. Customer funds are not protected by insurance in the event of the bankruptcy or insolvency of the FCM, or if customer funds are misappropriated. Customer funds are not protected by SIPC, even if the FCM is a Broker Dealer registered with the SEC. Customer funds are not insured by a Derivatives Clearing Organization (DCO) in the event of the bankruptcy or insolvency of the FCM holding the customer funds. Each customer’s funds are not held in an individual segregated account by an FCM, but rather are commingled in one or more accounts. FCMs may invest funds deposited by customers in investments listed in CFTC Regulation 1.25. Funds deposited by customers may be deposited with affiliated entities of the FCM, including affiliated banks and brokers.
Commission and other charges
Before you begin to trade, you should obtain a clear explanation of all commissions, fees, and other charges for which you will be liable. These charges will affect your net profit (if any) or increase your loss. Additional commissions may apply when trading naked short options.
Liquidation Fee (Depending on FCM)
If the Equity to Margin ratio (NLV/Initial Margin) in your account drops below 5% or $500.00, whichever comes first, the FCM reserves the right to liquidate open positions. In the event that the positions in your account are required to be liquidated by your broker due to inaction on your part, the FCM can charge a $50 or more per contract liquidation fee. You are responsible for monitoring your positions and are financially responsible for any losses generated by open positions.
Some FCMs reserves the right to charge a monthly inactivity fee to all customer accounts that have not traded or held positions in the prior three months. Exceptions to this fee will be accounts that are designated as hedge accounts or accounts that are related to other accounts that have traded or held positions during the same three-month period. Please note that this may be in addition to an inactivity fee charged by the Futures Commission Merchant that carries your account.
Transactions in other jurisdictions
Transactions on markets in other jurisdictions, including markets formally linked to a domestic market, may expose you to additional risk. Such markets may be subject to regulation that may offer different or diminished investor protection. Before you trade you should enquire about any rules relevant to your particular transactions. Your local regulatory authority will be unable to compel the enforcement of the rules of regulatory authorities or markets in other jurisdictions where your transactions have been effected. You should ask the firm with which you deal for details about the types of redress available in both your home jurisdiction and other relevant jurisdictions before you start to trade.
The profit or loss in transactions In foreign currency-denominated contracts (whether they are traded in your own or another jurisdiction) will be affected by fluctuations in currency rates where there is a need to convert from the currency denomination of the contract to another currency.
Most open-outcry and electronic trading facilities are supported by computer-based component systems for the order-routing, execution, matching, registration, or clearing of trades. As with all facilities and systems, they are vulnerable to temporary disruption or failure. Your ability to recover certain losses may be subject to limits on liability imposed by the system provider, the market, the clearing house, and/or member firms. Such limits may vary: you should ask the firm with which you deal for details in this respect.
Trading on an electronic trading system may differ not only from trading in an open-outcry market but also from trading on other electronic trading systems. If you undertake transactions on an electronic trading system, you will be exposed to risks associated with the system including the failure of hardware and software. The result of any system failure may be that your order is either not executed according to your instructions or is not executed at all.