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Trading and Investment Terminology

Options On Futures

An option on a futures contract provides the option contract owner the right, however not the commitment, to purchase or sell a particular futures contract at a strike price on or prior to the option contract's expiry date.

 

These work in a similar way to stock options, but vary in that the underlying asset is a futures contract.

 

Most options on futures contracts, for example, index option contracts, are settled in cash.

 

They likewise will in general be European style options, which implies that these options can't be exercised early.

 

An option on a futures contract is fundamentally the same as a stock option in that it provides the purchaser the right, however not commitment, to purchase or sell the underlying security, while making a potential obligation for the seller of the option contract to purchase or sell the underlying security if the purchaser so wants by exercising that option contract.

 

That implies the option on a futures contract, or futures option, is a derivative security of a derivative security.

 

In any case, the pricing as well as contract specifications of these option contracts does not really include leverage on top of leverage.

 

For call options contracts on futures, the owner of the option contract would go into the long side of the contract and would purchase the underlying security at the option contract's strike price.

 

For put options contracts on futures , the owner of the option contract would go into the short side of the contract and would sell the underlying security at the option contract's strike price.

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