Page 22 - Futures Money Machine-Study Session #5

Beyond The Basics

Options on Futures…

A futures option, or option on futures, is an option contract in which the underlying is a
single futures contract. The buyer of a futures option contract has the right (but not the
obligation) to assume a particular futures position at a specified price (the strike price) any
time before the option expires. The futures option seller must assume the opposite futures
position when the buyer exercises this right.

Expiration Dates: Futures options usually expire near the end of the month that precedes
the delivery month of the underlying futures contract (i.e. March option expires in February)
and very often, it is on a Friday.

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: When a futures option is exercised, a futures position is opened at
the predetermined strike price in both the buyer and the seller's account. Depending on
whether a call or a put is exercised, the option buyer and seller will assume either a long
position or a short position.