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Risk Disclosure
We believe it is imperative that you read and fully understand the following
risks of trading and investing:
GENERAL RISKS OF TRADING AND INVESTING
All securities trading, whether in stocks, options, or other investment
vehicles, is speculative in nature and involves substantial risk of loss. We
encourage our subscribers to invest carefully and to utilize the information
available at the websites of the Securities and Exchange Commission at http://www.sec.gov
and the National Association of Securities Dealers at http://www.nasd.com . You
can review public companies filings at the SEC's EDGAR page. The NASD has
published information on how to invest carefully at its website. We also
encourage you to get personal advice from your professional investment advisor
and to make independent investigations before acting on information that we
publish. Most of our information is derived directly from information published
by companies or submitted to governmental agencies on which we analyze and/or
rate from other sources we believe are reliable, without our independent
verification. Therefore, we cannot assure you that the information is accurate
or complete. We do not in any way warrant or guarantee the success of any action
you take in reliance on our statements, ratings, or recommendations.
1. You may lose money trading and investing.
Trading and investing in securities is always risky. For that reason, you should
trade or invest only "risk capital" -- money you can afford to lose. While this
is an individual matter, we recommend that you risk no more than 10% of your
liquid net worth -- and, in some cases, you should risk less than that. For
example, if 10% of your liquid net worth represents your entire retirement
savings, you should not use that amount to buy and sell securities. Trading
stock and stock options involves HIGH RISK and YOU can LOSE a lot of money.
2. Past performance is not necessarily indicative of future results.
All investments carry risk and all trading decisions of an individual remain the
responsibility of that individual. There is no guarantee that systems,
indicators, or trading signals will result in profits or that they will not
result in losses. All investors are advised to fully understand all risks
associated with any kind of trading or investing they choose to do.
3. Hypothetical or simulated performance is not indicative of future results.
Unless specifically noted otherwise, all profit examples provided in the our
websites and publications are based on hypothetical or simulated trading, which
means they are done on paper or electronically based on real market prices at
the time the recommendation is disseminated to the subscribers of this service,
but without actual money being invested. Also, such examples do not include the
costs of subscriptions, commissions, and other fees, or examples of other
recommendations as to which there were losses utilizing the timing at the time
of the recommendations. Because the trades underlying these examples have not
actually been executed, the results may understate or overstate the impact of
certain market factors, such as lack of liquidity (discussed below). Simulated
trading programs in general are also designed with the benefit of hindsight,
which may not be relevant to actual trading. We make no representations or
warranties that any account will or is likely to achieve profits similar to
those shown, because hypothetical or simulated performance is not necessarily
indicative of future results.
4. Don't enter any trade without fully understanding the worst-case scenarios of
that trade.
Trading securities like stock options can be extremely complicated, so make sure
you understand these trades before entering into them. For example, aggressive
positions in options have a greater probability of losing, while less aggressive
positions are less likely to yield substantial profits. Similarly, far
out-of-the-money options are unlikely to finish in the money, and options
purchased close to their expiration dates are very high-risk and, thus, likely
to win big or lose big very quickly. Don't enter any trade without fully
understanding the worst-case scenarios of that trade.
5. Profits can be lost if they are not taken at the right time.
Subscribers are advised to take profits at whatever point they deem optimal,
regardless of the profit target set in any given recommendation. Advisory
services such as those we offer provide recommendations. Subscribers are free to
follow the recommendation, follow it in part, or ignore it altogether. If a
subscriber believes a given profit is at risk, the subscriber should take the
profit. Similarly, if a subscriber feels a position is likely to lose value, or
a losing position is likely to fall further, the subscriber can choose to exit
at any time to preserve capital. The final decision as to when to take profits
remains in the sole discretion of the subscriber, keeping in mind that profits
can be lost if they are not taken at the right time.
RISKS OF FUTURES TRADING
A futures contract is a legally binding agreement between two parties to buy or
sell in the future, on a designated exchange, a specific quantity of a commodity
at a specific price. Because of the volatile nature of the commodities markets
and the use of leverage, trading in futures involves a high degree of risk.
Futures trading is not suitable for many members of the public. Such
transactions should be entered into only by persons who understand the nature
and extent of their rights and obligations under futures contracts and the risks
involved in the transactions covered by those contracts.
1. Because of the impact of leverage, your losses may exceed the entire amount
deposited in your account, or more.
Leverage is the ability to control large amounts of money with much smaller
amounts of risk capital. In futures trading, the amount of money you are
required to deposit is a small percentage of the value of the futures contracts
you trade. If you buy and hold a futures contract, a small positive movement in
price can have a large positive impact on your account; a small negative
movement in price can have a corresponding large negative impact on your
account. Therefore, leverage can work against you as well as for you.
Because of leverage, it is possible to lose all the money in your account very
quickly. Even worse, if the funds in your account fall below the amount required
by the futures broker, you will receive a margin call. A margin call is a demand
from the clearing house to deposit the difference in funds by the following
morning. The difference in funds can be substantial. If you cannot timely comply
with this request, your positions may be liquidated at a loss and you will be
liable for any remaining difference. Keep in mind that the funds in your account
may fall for reasons outside your control. Therefore, you should manage leverage
by limiting your trading as necessary to maintain sufficient excess margin in
your account.
2. Stop orders may reduce, but not eliminate, your trading risk.
A stop market order is an order, placed with your broker, to buy or sell a
particular futures contract at the market price if and when the price reaches a
specified level. Stop orders are often used by futures traders in an effort to
limit the amount they might lose. If and when the market reaches whatever price
you specify, a stop order becomes an order to execute the desired trade at the
best price immediately obtainable.
There can be no guarantee, however, that it will be possible under all market
conditions to execute the order at the price specified. In an active, volatile
market, the market price may be declining (or rising) so rapidly that there is
no opportunity to liquidate your position at the stop price you have designated.
Under these circumstances, the broker's only obligation is to execute your order
at the best price that is available. Therefore, stop orders may reduce, but not
eliminate, your trading risk.
GENERAL RISKS OF FUTURES OPTIONS TRADING
Buying or selling futures options or stock options is not suitable for many
people, and you should not trade options unless you fully understand the risks,
rights, and obligations of options trading. Use only money you can afford to
lose in options trading.
1. You should not sell options on futures unless you can meet margin calls and
survive large financial losses.
When you buy an option, you risk losing the entire purchase price plus the
commissions paid, but not more since purchasing options on margin is not
allowed. The amount you spend up front is the maximum you can lose. When you
sell an option, you may be required to deposit additional margin if the price of
the commodity moves adversely. You should not sell options unless you can meet
margin calls and survive large financial losses. In cases where the exchange has
difficulty finding buyers, the option seller is subject to the full risk of the
position until the options expire.
SPECIFIC RISKS OF FUTURES OPTIONS TRADING
An option on a commodity futures contract is a legally binding agreement between
two parties which gives the buyer, who pays a market determined price known as a
"premium," the right (but not the obligation), within a specific time period, to
exercise the option. Buying or selling futures options is not suitable for many
people, and you should not trade futures options unless you fully understand the
risks, rights, and obligations of commodities options trading.
1. The futures option, if exercised, will result in the establishment of a
futures position.
Both the purchaser and grantor of an option on a futures contract should realize
that the option, if exercised, will result in the establishment of a futures
position, subject to all the risks such contracts carry (see above). The buyer
of a call option will be assigned a long position in the underlying futures if
exercised, while the buyer of a put option will be assigned a short position in
the underlying futures if exercised. The purchaser of an option should be aware
that some option contracts provide for only a limited period of time during
which an option may be exercised.
2. You may be unable to liquidate your position because of lack of liquidity in
the futures or options market.
Exchange trading mechanics are designed to provide for competitive execution and
to make available to buyers and to sellers a continuous market in which an
option once purchased can later be sold; and in which an option, once granted,
can later be liquidated by an offsetting purchase. Although each exchange's
trading system is designed to provide market liquidity for the options traded on
that exchange, there can be no assurance that a liquid offset market on the
exchange will exist for any particular option, or at any particular time, and
for some options, no offset market on that exchange may exist at all. In such an
event, it may not be possible to effect offsetting transactions in particular
options. Thus, to realize any profit, a holder will have to exercise their
option and have to assume all risks and to comply with margin requirements for
the underlying futures contracts or, in the event of an option on a physical
commodity, incur the costs and risks of holding the physical good. A grantor
could not terminate its obligation until the option expired or the grantor was
assigned an exercise notice. You may exercise your option but be unable to
liquidate your resulting futures position because of daily price limits or lack
of liquidity in the futures market.
3. Lack of pricing limits on some options.
The trader should be aware that an option may not be subject to daily price
fluctuation limits even if the underlying futures position has such limits and,
as a result, normal pricing relationships between options and the underlying
futures may not exist. Also, futures positions assigned as a result of an
expiring option may not be capable of being offset if the underlying futures
contract is at a price limit.
4. Additional risks of writing or granting futures options.
The grantor of a call option who does not have a long position in the underlying
futures contract (i.e. a "naked" sale or short) is subject to risk of loss
should the price of the underlying futures be higher than the strike price of
the option, and this loss may exceed the premium received for the initial sale
of the call option. The grantor of a call option who has a long position in the
underlying futures (i.e. a "covered" sale or short) is subject to the risk of
decline in price of the underlying futures, less the premium received for
granting the call option. In exchange for the premium received, the call option
grantor gives up all of the potential gain resulting from an increase in the
price of the underlying futures above the strike price of the option. The
grantor of a put option who does not have a short position in the underlying
futures contract (i.e. a "naked" sale or short) is subject to risk of loss
should the price of the underlying futures be below the strike price of the
option, and this loss may exceed the premium received for the initial sale of
the put option. The grantor of a put option who has a short position in the
underlying futures (i.e. a "covered" sale or short) is subject to the risk of a
rise in price of the underlying futures, less the premium received for granting
the put option. In exchange for the premium received, the put option grantor
gives up all of the potential gain resulting from a decrease in the price of the
underlying futures below the strike price of the option.
RISKS OF INVESTING IN STOCK
Investments always entail some degree of risk. Be aware that:
1. Some investments in stock cannot easily be sold or converted to cash. Check
to see if there is any penalty or charge if you must sell an investment quickly.
2. Investments in stock issued by a company with little or no operating history
or published information involves greater risk than investing in a public
company with an operating history and extensive public information. There are
additional risks if that is a low priced stock with a limited trading market,
e.g., so-called penny stocks.
3. Stock investments, including mutual funds, are not federally insured against
a loss in market value.
4. Stock you own may be subject to tender offers, mergers, reorganizations, or
third-party actions that can affect the value of your ownership interest. Pay
careful attention to public announcements and information sent to you about such
transactions. They involve complex investment decisions. Be sure you fully
understand the terms of any offer to exchange or sell your shares before you
act. In some cases, such as partial or two-tier tender offers, failure to act
can have detrimental effects on your investment.
The greatest risk in buying shares of stock is having the value of the stock
fall to zero. On the other hand, the risk of selling stock short can be
substantial. "Short selling" means selling stock that the seller does not own,
or any sale that is completed by the delivery of a security borrowed by the
seller. Short selling is a legitimate trading strategy, but assumes that the
seller will be able to buy the stock at a more favorable price than the price at
which they sold short. If this is not the case, then the seller will be liable
for the increase in price of the shorted stock, which could be substantial.
SPECIFIC RISKS OF STOCK OPTIONS TRADING
When you open a stock option account, you should receive a booklet entitled
"Characteristics and Risks of Standardized Options," which is also available on
the Chicago Board Options Exchange website at http://www.cboe.com/resources/intro.asp
. This booklet contains an in-depth discussion of the characteristics and risks
associated with stock options trading. We strongly encourage you to carefully
read and understand this information.
1. Assignment of exercise to writers.
As a writer of a stock option, you may be assigned an exercise at any time from
the date of sale through approximately two days after the date of expiration.
The consequences of being assigned an exercise depend upon whether the writer of
a call is covered or uncovered, as discussed below. Since an option writer may
not be informed of the assignment of exercise until up to two days after
expiration, special risks can come into play. For example, an option writer who
sells out their underlying position upon expiration may find out the next day
that they have to surrender stock they do not now own.
2. Risk of unlimited losses for uncovered writers of call options.
A "naked" or uncovered writer of a call option is at substantial risk should the
value of the underlying stock move unfavorably against the position. For a naked
call writer, the risk of loss is theoretically unlimited. The obligation of a
naked writer that is not secured by cash to meet applicable margin requirements
creates additional risks. A harsh adverse move in stock prices can create steep
margin call scenarios in which a brokerage firm may liquidate other holdings in
the writer's account(s) to cover the option. Since pricing of options tends to
be magnified relative to the underlying stock, the naked writer may be at
significantly greater risk than a short seller of the underlying stock.
3. Deep out-of-the-money options carry high risk of loss.
Although purchasing stock options at strike prices significantly above or below
the current market price can be very inexpensive, you are at high risk of losing
your money. There are two versions of deep out-of-the-money options:
A deep out-of-the-money call is an option to purchase 100 shares of stock at a
price far above the current market price.
A deep out-of-the-money put is an option to sell 100 shares of stock at a price
far below the current market price.
Although these options seem inexpensive, the chances of making a profit on such
transactions are extremely low. Therefore, novice traders should avoid buying
deep out-of-the-money options.
4. Out-of-the-money options near their expiration date carry a high risk of
loss.
The closer you buy an out-of-the-money option to its expiration date, the less
likely it is to end up profitable. Although these options are cheap, in order to
win in such situations, you will need precise timing and the occurrence of a
major event that significantly moves the underlying future in your favor.
Therefore, the risk associated with these options is high and you are likely to
lose your entire investment in these positions.
Each advisory service we provide will offer a special discussion of risks. As
you move through the educational materials that teach you how to use each
service, be sure to carefully read the risks section. It elaborates on risks
specific to the types of recommendations you might see in that service. Do not
enter any trade without understanding all risks associated with that type of
trading.
Conclusion:
Once again, we stress the importance of understanding all of the risks of any
form of trading or investing that you choose to do. One should fully understand
the worst-case scenario prior to trading or investing real dollars. Past
performance is not necessarily indicative of future results. You take full
responsibility for all trading actions, and should make every effort to
understand the risks involved.
Copyright ©2005 Capital Essence Corp. All rights reserved.
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