Options on Futures

Futures are generally contracts for the future delivery of the basic goods that make our economy run. Metals, Grains, Meats, Energies, U.S. Treasury Bonds, Currencies (i.e. Swiss Franc, Japanese Yen, British Pound and Euro) and even Stock Market Indexes (i.e. S&P 500 and NYSE) are all traded on the futures market. Contracts include a specified number of units (ounces of metal, bushels of grain, pounds of meat, U.S. gallons of oil etc.) and a date for delivery.

Futures are used by farmers and food processors to protect themselves against sudden changes in the prices of their commodities... by banks and other large financial institutions to "hedge" against changes in interest rates or stock prices... and by speculators to seek the high leverage and profit potential afforded by these dynamic markets.

Options contracts convey the right, though not obligation, to buy or sell a particular futures contract at a specified price for a limited time. There are two distinct types of options: calls and puts. Calls give the option buyer the right to purchase a particular futures contract at a stated price at any time during the life of an option. Puts give the option buyer the right to sell a particular futures contract at a stated price at any time during the life of an option. If the option buyer elects to exercise the option, then the option seller is obligated to deliver a futures position at the strike price of the option.

For more information about options on futures, please see the following guide:

Buying Options on Futures Contracts: A Guide to Uses and Risks (This guide is property of the NFA)