Commodity Myths and Misunderstandings

Myth # 1 - Commodity Delivery You may have heard the nightmarish story of the man who invested in the commodity futures market and ended up with 42,000 gallons of unleaded gasoline dropped off at his front door. Well, this is not how the commodity markets work, delivery does not take place like that. In order to be a successful commodity trader, you need to understand how the commodity markets operate. You need to know the difference between fact and fiction. When you have a long futures contract - you are agreeing to receive or "take delivery" of a commodity on expiration of the contract. When you have a short futures contract - you are agreeing to deliver or "make delivery" of a commodity on expiration of the contract. If you want to avoid making or taking delivery - simply offset, or get rid of, the contract. Pay attention to the markets. Liquidate well before your position expires and you will never be forced to make or take delivery. If you have a long position, you offset the contract by selling. If you have a short position, you offset by buying. 97% of commodity futures investors offset by selling or buying. Only 3% of commodity futures investors actually take or make delivery.

Myth # 2 - Margin Calls Many first-time investors shy away from commodity markets because they have heard rumors of investors losing their homes, cars, boats and life savings due to receiving margin calls. Not to say it couldn't happen, but it is an extremely rare occurrence. Manage margin calls by keeping a close watch on the markets, or find a broker who will watch the markets for you. Either way, margin calls can be avoided in many circumstances by simply paying attention. (click here to access free quotes on all commodity markets) If you do receive a margin call, do not meet it, simply liquidate your positions. If you meet a margin call, the market must recover 100% for you to simply break-even. You are much better off cutting your losses by liquidating. If you want to avoid the chance of a margin call altogether, consider purchasing options as an investment strategy. When you purchase an option you can not lose more than your initial investment and you will not ever receive a margin call.