A futures option, or option on futures, is an option contract that references a specified futures contract. For an option that delivers a futures position, the buyer has the right, but not the obligation, to assume that position at the strike price under the option’s exercise rules. The assigned seller assumes the opposite futures position. Some futures options settle in cash instead; check the specific contract.
If you are unfamiliar with futures, it is recommended that you learn more about trading futures contracts before continuing with the rest of this article.
Things To Note When Trading Futures Options
Expiration Dates
Futures-option expiration is product- and series-specific. Monthly, weekly and other schedules can exist, and the option’s last trading time and exercise cutoff need not match the underlying futures contract’s dates. Do not assume every option expires on a Friday in the preceding month; confirm the exact option series and underlying futures month.
Strike Price
This is the price at which the futures position will be opened in the trading accounts of both the buyer and the seller if the futures option is exercised.
Exercise & Assignment
For an option that delivers a futures position, exercise creates opposing positions at the strike in the holder’s and assigned writer’s accounts. The table shows the direction of those positions. Cash-settled options instead create the cash payment specified by their terms.
| Futures positions assumed upon option exercise | ||
| Buyer Assumes | Seller Assumes | |
| Call Option | Long Futures Position | Short Futures Position |
| Put Option | Short Futures Position | Long Futures Position |
Futures Option Pricing
It is important to remember that the underlying of a futures option is the futures contract, not the commodity. Hence, the option price moves along with the futures price and not the commodity price. Although the futures price tracks the commodity price closely, they are not the same. For highly leveraged products like options, the impact of such tiny differences can be greatly magnified.
Premiums, margin and price risk
Premium quotations, multipliers and margining conventions differ across contracts. A resulting futures position carries variation-margin and potential delivery obligations. Losses can exceed the margin deposit. Some futures can trade below zero, so stock-option payoff assumptions based on a zero price floor are not universal futures risk limits.
Our stock/ETF expiration calculators do not model futures margin, settlement or negative underlying prices. Read the futures margin guide and the relevant exchange specifications.
American-style futures options can permit early exercise; European-style options restrict it to expiration. A futures position created through exercise can have variation-margin, settlement or delivery obligations. See the exchange’s current option specifications.
