Futures are forward contracts tradable on numerous different underlyings (stock indices, energy commodities, agricultural commodities, bonds, currencies, etc.) and are used by private traders in particular for speculative purposes. On futures and options exchanges, it is also possible to Options on the main futures which significantly increases the number of strategies that can be traded. In this article you will learn what futures options are and what their special features are.
What is a futures option?
The buyer of a futures option acquires the right to buy (call option) or sell (put option) a specific underlying futures contract at a specific price (strike price). The option seller receives from the option buyer the Option premium and in return undertakes to buy (put) or sell (call) the future if the option buyer exercises his right and exercises the option.
Special features of futures options
Futures options can basically be traded in the same way as Options on shares, ETFs or indices. In the following, we will go into some of the special features of futures options.
Multiplier
Futures are leveraged instruments. A futures contract always refers to a defined quantity of the underlying (e.g. 1000 barrels of crude oil). Futures options have the same multiplier as the underlying futures contract.
Since each futures contract moves a different amount of a particular commodity, futures options have different multipliers. You can read the respective multiplier in the contract details of the respective option.
Settlement method
The underlying of a futures option is the respective futures contract. If physical settlement occurs, it is not the commodity itself that is bought or sold, but the corresponding future.
Most futures options are physical settled; however, there are also those that are settled in cash.
Exercise style
The majority of futures options are American style options. I.e. the option buyer can exercise his right to exercise the option during the entire term of the option. As there are also exceptions, in case of doubt you can read the exercise style in the contract details of the option.