Futures Options

Simply put, the term Futures Options is used to explain the process of securing options on futures contracts that may or may not be bought or sold. You have the right to purchase or sell a given commodity contract but you are under no obligation to do so. Futures options contracts that can be traded include financials like t-bonds, grains like corn and other contracts like crude oil.

Currently there are about 100 places in the world where the trading of futures options are conducted. These establishments are known as futures exchanges and although one imagines from examples seen in the media that futures trading is a noisy bustle and elbow nudging scrum of people in brightly coloured jackets fighting for the best price, that is not the case in many futures options trading because a lot of futures options trading is conducted using the internet and intranet on closed secure systems.

The concept behind futures options trading is simple. Each option contract follows a particular futures market. This futures market is called the underlying market. Two parties agree to sell and buy an option. That contract sold is purchased by someone who believes that the value of the underlying futures market will move in a certain direction before its contract expires.

One of the most popular commodities traded worldwide in the futures options markets is Oil. One reason is because over the last 20 years the price of a barrel of Oil has been so volatile and in that period has risen from below $10 per barrel to over $150 for the same barrel.

Although demand for Oil has been a contributing factor as well as the greed of suppliers, one major reason for the substantial rise in Oil prices is the trading of its futures contract. We mentioned how futures options follow an underlying futures contract. There is also the cash market. For example a corn farmer sells his corn in the cash market. The cash market price affects the futures but also the futures market price affects the cash market.