Commodities investing, like the intro on the Types of Futures Investments page indicated – can be risky, but offers an opportunity for some participants to benefit either by hedging their actual trade needs, or by gaining money from the changes in prices for contracts over time. There is still a substantial risk of a loss no matter who is managing your money or what strategies are used.

The speculators are a kind of lifeforce for the markets – they take on the majority of this risk but add much needed liquidity for fair price discovery. Buyers and sellers are not transacting things directly with each other for commodities investing. Instead, a clearing house takes the opposite side to any transaction, acting in a sort of guarantor position. Each trader is responsible for putting up a performance bond of sorts before investing funds. This is known as margin.

Before ever initiating a trade for commodities investing, a trader must open an account and deposit enough margin to cover initial requirements. There is also a maintenance margin level that the account must maintain as long as the trading position is open. That mean that if the losses on the position make the balance drop below the maintenance margin levels, the account owner has to deposit more money. This may be true even in the case of a managed futures strategy. Also, there are commissions and fees deducted for every transaction that have to be accounted for when planning a trade. Make sure you are aware of the possible fees, as well as the incentive fees the managed futures account may incur.

Options on futures contracts are a little different and may not require margin when purchased. An account would still have to have the full cost of option premium, plus commissions and fees, before opening a long option position for commodities trading.

Short option strategies, or option writing, that was touched on in the What makes a Managed Futures Strategy? Section will likely require margin. The value or total of this margin may vary based on the type of commodities investing strategy as well as the volatility of the underlying market.

Learn more about the world of commodities investing and register for free to gain access to more research on managed futures strategies.

Trading in futures and options involves a substantial degree of a risk of loss and is not suitable for all investors. Past performance is not indicative of future results.