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  1. Introduction - Day Traders
  2. Introduction - Day Trading and Options
  3. Types of Options
  4. Near Month In-The-Money Options and The Protective Put
  5. Stock Options and Weekly Options
  6. Mini Options
  7. Index Options and Mini Index Options
  8. Binary Options
  9. Options on Futures
  10. ES Weekly Options and E-Mini Options
  11. ETF Options and IRA Options
  12. Conclusion

9. Options on Futures. This is an option contract based on a single futures contract. The buyer has the right (but not the obligation) to take on a particular futures position of a commodity, currency, index, or financial instrument, at a specified price (the strike price) any time before the option expires. The futures option seller is obliged to adopt the opposite futures position when the buyer exercises this right. Options on futures are traded on the same exchanges where the original futures contracts are traded. The options contracts match the underlying futures contracts in regard to quantity, expiration date, and exercise or strike price.

There are several differences between futures and options on futures. For one, there are different obligations for buyers and sellers. Let’s take a deeper look at the difference between futures contracts and options on futures contracts. 

Futures contract

With a futures contract, the buyer has the obligation to buy the specified asset at a particular future date. The seller must sell and deliver the asset on that future date, with the exception being that the holder's position is closed before the date of expiration. A futures contract does not incur an initial cost, unlike options contracts. The size of the underlying position is generally larger. Gains are added to the futures account at the end of the trading day mark to market daily. This  means that the value of the asset is recorded according to its current market price.

Options on futures contract

With the purchase of an option on futures, the buyer has the right, but is not obliged, to buy (or sell) the specified asset for a predetermined price. This right may be exercised at any time within the duration of the contract. The options contract must be purchased by paying the option premium. The size of the underlying position is generally smaller than for a futures contract. Gains can be made in the following ways:

  • The exercise of the option when it is deep in-the-money
  • Taking the opposite position as a hedging technique
  • Holding the option until expiry and gaining the amount of increase between the asset price and the strike price

ES Weekly Options and E-Mini Options
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