Reversing an earlier decision, the Commodity Futures Trading Commission refused by a 2-2 vote yesterday to legalize trading in commodity options.
CFTC Chairman James Stone and Commissioner David Gartner blocked the options proposal, saying that for different reasons they feared the CFTC could not protect naive investors from unscrupulous commodity salesmen.
Commodity options are high-risk investments that give the options buyer the right to buy (or sell) a commodity futures contract at some future date at a fixed price. If the futures price climbs above the options price, the options buyer can make a profit, sometimes thousands of dollars on an investment of a few hundred dollars. But if the futures price falls, the options become worthless.
Commodity options trading was banned by the CFTC in June 1978, in the wake of the Lloyd Carr Scandal. Investors lost millions of dollars on what proved to be worthless London commodity options purchased from Lloyd Carr & Co. of Boston.
A few months later, Congress wrote the administrative ban on options into the Commodity Exchange Act, saying the CFTC could permit commodity Exchange Act, saying the CFTC could permit commodity options sales to resume on a limited basis only if the agency demonstrated it could regulate the business effectively.
Gartner said yesterday he opposes options trading because he believes the CFTC could not meet the congressional mandate. "I don't feel at this time that we have the resources" to oversee the fraud-tainted options business, he said.
Expressing "some sympathy" for Gartner's complaint, CFTC Chairman Stone said he would back options trading only if the plan included a "suitability requirement" for options investors. Such a provision would require options dealers to make sure that the risky investments are suitable for their customers.
Although the Securities and Exchange Commission imposes such a suitability requirement on stock brokers, the commodity industry has strenuously opposed that type of rule for futures market investors. A suitability rule might prevent a broker from selling a high-risk investment -- such as a speculative stock or a commodity option -- to a small investor interested in building a nest egg for retirement.
The CFTC staff -- apparently at Chairman Stone's urging -- wrote a suitability clause into the options proposal that was presented to the commission yesterday. Stone was the only one of the four commissioners to back the rule, and when it was rejected, Stone said he could not support options trading without it.
With Stone and Gartner voting against it and Commissioners Robert Martin and Reed Dunn voting for it, the options proposal died in a deadlock. The fifth seat on the CFTC -- the tie-breaker -- is vacant.
Earlier this summer, the commission directed its staff to draw a detailed plan to resume options trading in gold, copper and Government National Mortage Association mortages.
Despite yesterday's action, regulating commodity options sales remains a major law enforcement problem for the CFTC. The agency has sued serveral firms for illegal options sales in recent months. Many of the charges involved firms selling gold options from telephone "boiler rooms" staffed by high-pressure salespersons.
The appeal of options to investors is the potential for large profits from a small investment. The premium paid for commodity options typically is in the $100-to- $200 range.
In the past four weeks, the price of gold has jumped $40 an ounce, resulting in a $4,000 increase in the value of an option to buy a 100-ounce gold futures contract.