An option that gives the holder the right, without the obligation, to enter into a futures contract at a specified futures price before or on a certain expiration date. In general, futures options are American-style. Once exercised, a futures option allows the holder to acquire a position in the underlying futures contract in addition to a cash amount representing the difference between the most recent settlement futures price and the set strike price, or vice versa.
The effective payoff from a futures option is determined in the difference between the futures price at exercise date and the strike price, or the other way round, depending on whether the option is a call or a put. For example, a call option on euro gives the holder the right to purchase euro in the spot market at an exchange rate equal to the strike price, whilst a call option on euro futures gives the holder the right to receive the amount by which the futures price is above the strike price. If the euro futures option is exercised, the holder then enters into a long position in the euro futures contract.
Futures options are referred to not by the expiration month of the option, but actually by the delivery month of the underlying futures contract.
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