ON-LINE TRADING LESSON
Trading futures and options involves risk and is not suitable for everyone. 

On-Line Trading Lessons

    Courtesy of the Chicago Mercantile Exchange

Lesson 12 -- Options on Futures

(Note - if you’re new to the futures industry, you may want to begin with Web Instant Lesson #1, The Futures Contract.)

Options on futures were introduced in the 1980s. An option contract allows you the right, but not the obligation, to buy or sell an underlying futures contract at a particular price.

Say that again!

An option is the right, but not the obligation, to buy or sell an underlying futures contract at a specified price. For example, you could purchase an option to buy a November Swiss franc futures contract at 88¢ per Swiss franc (an option to buy is a "call" option).

What do you do once you buy the Swiss franc option? You watch price movement. Suppose the November Swiss franc futures price rises above 88¢. You could exercise the option and assume a long November Swiss franc futures contract. You would have bought futures contract at 88¢ that you could sell immediately at the higher price (buy low, sell high). But you don’t have to. With prices above 88¢, your option would have increased in value, so you could choose to offset it by selling back the same option at a profit. If the futures price falls below 88¢, the option would have decreased in value. Then you can simply forget about it and let it expire, losing the money you paid for it.

Puts and calls: There are special names for options, depending on whether the option is for the right to buy or sell a futures contract. A put option is the right, but not the obligation, to sell a futures contract at a particular price. A call option is the right, but not the obligation, to buy a futures contract at a particular price. These terms originated from the concept of putting a commodity on the market (selling) and calling a commodity from the market (buying).

Options Trading

In options trading, the buyer has a right, the seller has an obligation. An option buyer purchases the right, but not the obligation, to buy or sell the underlying futures contract at a specified price. For every option bought, someone has to sell that option.

Options on futures contracts were first traded in October of 1982 when the Chicago Board of Trade (CBOT) began trading options on T-bond futures. Soon after, the Chicago Mercantile Exchange (CME) opened its Index and Options Market (IOM) division which offered options on stock index futures, Eurodollar futures and T-bill futures. In that first year of 1982, only 177,350 options contracts were traded. Look at the growth that followed.

What options are traded?

Today at the U.S. exchanges, options are available on a great variety of futures contracts. These include the following commodity groups: Agricultural commodities, foreign currencies, interest rate products, equity indices, energy products and metals. More options are traded on interest rate futures than any other category.

The top ten options traded in 1995 are listed below. (NYMEX stands for the New York Mercantile Exchange.)

Chicago’s Role

As with futures trading, most of the options on futures contracts traded in the U.S. occur on the Chicago futures exchanges. The CBOT, the CME and the MidAmerica Commodity Exchange trade over 85% of all options traded in the country. Almost 15% are traded at New York exchanges.

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