A futures option in which the underlying of the underlying futures is a bond. In more specific terms, a bond futures option is an option to enter into a bond futures contract. The holder has the right to exercise the option by a preset expiration date. However, the holder cannot use the exercise price (strike price) to exchange for an out-of-the-money futures contract.

A bond futures option is only cash settled (physical settlement is not possible). The holder will receive the positive difference between the futures price at the option’s expiration date and the strike price. Otherwise, the holder gets nothing.