What Are Options on Futures

Options on futures are derivative instruments similar to the options you might buy on a single stock, but instead of the underlying asset being shares of a specific company, the underlying asset is a futures contract.

An option on a futures contract gives the holder the right, but not the obligation, to buy (in the case of a call option) or sell (in the case of a put option) a specific futures contract at a predetermined price (the strike price) on or before a certain date (the expiration date).

How Do Options on Futures Work?

Options on futures work much like options on stocks, but instead of the right to buy or sell shares of a company's stock at a certain price on or before a certain date, an option on a futures contract gives the buyer the right (but not the obligation) to enter into a specified futures contract.

Call Option on Futures

If you buy a call option on a futures contract, you have the right (but not the obligation) to assume a long position in the underlying futures contract at the strike price on or before the expiration date. If the futures price rises above the strike price, you could theoretically profit by exercising the option and then selling the futures contract at the higher market price.