Options on futures, or futures options, are unique derivative instruments with futures contracts as their underlying assets. Options on futures are available across all major asset classes including interest rates, equity indexes, energy, agriculture, forex and metals.
In addition to presenting trading opportunities in these liquid markets, options on futures can help traders mitigate risk and diversify their portfolios. The price at which a futures option can be bought or sold is known as the strike price.
The Importance of Strike Price
Call and put options on futures are based on underlying futures markets moving above or below a set price, known as the strike price. Sometimes referred to as the exercise price, it is the price at which the underlying futures contract can be bought or sold.
- For Call Options on Futures: The strike price is the price where the underlying futures contract can be bought by the call option holder (buyer) until the expiration date. The call holder has the right but not the obligation to buy the futures contract at the strike price before expiry.
- For Put Options on Futures: The strike price is where the underlying contract can be sold by the put option holder before it expires. The put holder has the right but is not obligated to sell the futures contract at the strike price before expiration.
For example, holding a September 2985 E-mini S&P 500 call option gives you the option to buy a September ES contract at 2985 before the futures option expires. Holding a September 2985 E-mini S&P 500 put option grants the option to sell a September ES contract at 2985 before expiration.
However, in most cases options on futures traders do not exercise their options and close their positions before expiration.
Although options trading can be a way to hedge risk, speculative trading of options on futures involves risks of its own and traders should manage their exposure accordingly.
Learn more about Options on Futures in this short video overview:
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