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. We are a financial publisher and do not provide
personalized trading or investment advice.
We are a financial publisher. We publish information regarding
companies in which we believe our subscribers may be interested
and our reports reflect our sincere opinions. However, the
information in our publications is not intended to be
personalized recommendations to buy, hold, or sell securities.
As a financial publisher, we are not legally permitted to offer
personalized trading or investment advice to our subscribers.
If a subscriber chooses to engage in trading or investing that
he or she does not fully understand, we may not advise the
subscriber on what to do to salvage a position gone wrong. We
also may not address winning positions or personal trading or
investing ideas with subscribers. Therefore, subscribers will
need to depend on their own mastery of the details of trading
and investing in order to handle problematic situations that
may arise, including the consultation of their own brokers and
advisors as they deem appropriate.
6. 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 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.
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.
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 ©2006 Tactical
Trading Outlook, LLC. All rights reserved.
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