What are Futures Options?
An option on a futures contract is the right, but not the obligation, to buy or sell a specific underlying futures contract at a certain price on or before the option’s expiration date. They are similar to stock options, but are different because the underlying instrument is a futures contract.
Futures Options Benefits
- Protect against downside risk, by using an option to limit the loss on a current futures position.
- Trade options for speculative purposes, whether you are selling options to receive premium income or using options to establish a position in a particular commodity, index or interest rate.
- Use options on futures as a hedging instrument, where they can produce offsetting gains if there are adverse price changes in the cash market.
- Pay less $ to control the same underlying instrument - Options permit you to benefit from the price movements of the underlying asset without having to buy the asset outright, you would only pay for the option premium.
Futures Options Risks
- Depending on the type of option strategy you invest in, it could expose the investor to unlimited losses. For example, the option seller (writer) can incur losses greater than the price of the contract.
- Need to predict the short-term direction of the market in order to take advantage of short-term or near-term options contracts.
- Decide when you should get out of an options contract, especially if the outcome is not what you expected, prior to the expiration date.
Micro Options & Standard Futures Options
CME Group has options on standard futures contracts like gold, ES, NQ etc…. You can buy/sell option strategies that correlate to one of these standard futures contracts. Last August, they also introduced Micro Mini Options. These options cost less to get into and correlate to the Micro Mini ES & NQ contracts. They allow traders to get into the futures markets at 1/10th of the cost with the added flexibility of trading the Options contract instead of the actual underlying micro mini contract. Micro options and standard options on futures contracts give traders many more options when creating their trading strategies.
Summary
Options on futures provide a lower cost way to control the underlying futures instrument as they are only paying the premium for the options strategy. Whether you are buying or selling options on futures, there are many strike price choices and expiration dates available to take full advantage of a trading strategy based on your risk tolerance and market expectations.
Want more education on Micro Options? Visit our Micro Options Education page.
Before trading options on futures, please review the RISK DISCLOSURE STATEMENT FOR FUTURES AND OPTIONS.