SPM provides customized alternative investment programs and investment management services. These investment strategies may involve trading options and futures on stocks and stock indices, and generally will involve significant risks which are not suitable for everyone. THE RISK OF LOSS IN TRADING COMMODITY FUTURES CONTRACTS CAN BE SUBSTANTIAL. YOU SHOULD, THEREFORE, CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES AND FINANCIAL RESOURCES.
Additional information about the Opportunity and Risk to Trading Futures and Options on Futures is available on the NFA website here. Additional information about the Characteristics & Risks of Standardized Options is available on the Options Clearing Corporation website here.
No assurance can be given that a client will realize a profit on its portfolio, that they will not lose some or all of their portfolio account equity, or that they will not incur substantial additional losses. Additionally, a client will be subject to margin calls if the assets of their portfolio account are insufficient to satisfy the margin requirements of the specific trading program being implemented for the client. Past performance, or the results of a particular period, are not necessarily be indicative of future results.
Futures Trading
When trading in commodity futures contracts, you should understand that:
(1) You may sustain a total loss of the funds that you deposit with your broker to establish or maintain a position in the commodity futures market, and you may incur losses beyond these amounts. If the market moves against your position, you may be called upon by your broker to deposit a substantial amount of additional margin funds, on short notice, in order to maintain your position. If you do not provide the required funds within the time required by your broker, your position may be liquidated at a loss, and you will be liable for any resulting deficit in your account.Options Trading
(2) Under certain market conditions, you may find it difficult or impossible to liquidate a position. This can occur, for example, when the market reaches a daily price fluctuation limit (“limit move”).
(3) Placing contingent orders, such as “stop-loss” or “stop-limit” orders, will not necessarily limit your losses to the intended amounts, since market conditions on the exchange where the order is placed may make it impossible to execute such orders.
(4) All futures positions involve risk, and a “spread” position may not be less risky than an outright “long” or “short” position. (5) The high degree of leverage (gearing) that is often obtainable in futures trading because of the small margin requirements can work against you as well as for you. Leverage (gearing) can lead to large losses as well as gains.
(6) You should consult your broker concerning the nature of the protections available to safeguard funds or property deposited for your account.
Variable degree of risk
Transactions in options carry a high degree of risk. You should familiarize yourself with the type of option (i.e., purchase or sell a put or call) which you contemplate SPM trading on your behalf under the specific trading program being implemented and their associated risks. You should calculate the extent to which the value of the options must increase for positions to become profitable, taking into account the premium and all transaction costs.
A 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 Trading 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 then 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 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 Trading 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 Risks Common To Futures And Options
Terms and conditions of contracts
You should ask the firm(s) where you maintain your account(s) 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.
Commission and other charges
Before you authorize SPM to begin to trade, you should obtain a clear explanation of all commission, fees and other charges for which you will be liable. These charges will affect your net profit (if any) or increase your loss.
Trading facilities
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(s) where you maintain your account(s) for details in this respect.
Electronic trading
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. SPM utilizes electronic trading systems, and thus you will be exposed to risks associated with the use of such systems, including the failure of hardware, software and network infrastructures. The result of any system or network failure may be that your order is either not executed according to your instructions or is not executed at all.