Section 2.3 Securities Definition

Are commodity futures considered securities? And if not, why are options considered securities?

1 Like

Hi @Mass_coffee_louse - good question. Commodities futures contracts are not considered securities, but options are securities. It all goes back to the Howey Decision, which determined a security involves:

  • Investment of money
  • Common enterprise
  • Expectation of profit
  • Third-party effort

Much of this has been argued by lawyers in courts, but my understanding is there’s a lack of “third party effort” when betting on commodities prices. A commodity’s value rises and falls based on demand, but no centralized party is influencing the value. For example, there is no one central authority overseeing corn farming.

On the other hand, an equity (stock) option’s value is based on the a stock’s market price. The stock’s market price is primarily influenced by the actions of the issuer. For example, Coca-cola’s performance as a company will primarily drive demand for its stock, ultimately influencing Coca-cola options. So there’s still an element of “third party effort.”

I hope this provides some context. Honestly, I don’t know much more about the legal arguments behind this concept. Good news - I doubt there is any question in NASAA’s bank that asks about the reasoning.

One last thing to point out - futures on securities are securities. There’s no indication the exam covers this type of futures contract, but you may see this mentioned if you’re researching the topic. We only expect you to encounter questions on commodities futures, which are not securities.


Thanks; that clears it up for me a bit. But you mentioned options on equities…what about commodity options? Based on the explanation you gave, they should not be considered securities because there is no entity influencing the value of the underlying commodity. However, the section mentions that commodity options are considered securities:

While currencies and commodities are not considered securities, options on them are.

1 Like

Fair point. I’ll try to find more legal briefings on the topic, but commodity and currency-based options are not very popular. I might not find much without reading through court cases. Options are issued by the Options Clearing Corporation (OCC), which may be the “third party efforts” aspect. But again, the reasoning is not important for test purposes. Just need to know the “what,” not the “why.”