A Complete Guide to the Futures Market, 2nd Edition

CHAPTER 34

An Introduction to Options on Futures

A put might more properly be called a stick. For the whole point of a put—its purpose, if you will—is that it gives its owner the right to force 100 shares of some godforsaken stock onto someone else at a price at which he would very likely rather not take it. So what you are really doing is sticking it to him.

—Andrew Tobias

Getting By on $100,000 a Year (and Other Sad Tales)

■ Preliminaries

There are two basic types of options: calls and puts. The purchase of a call option on futures¹ provides the buyer with the right, but not the obligation, to purchase the underlying futures contract at a specified price, called the strike or exercise price, at any time up to and including the expiration date.² A put option provides the buyer with the right, but not the obligation, to sell the underlying futures contract at the strike price at any time prior to expiration. (Note, therefore, that buying a put is a bearish trade, while selling a put is a bullish trade.) The price of an option is called the premium, and is quoted in either dollars (or cents) per unit or points. Table 34.1 illustrates how to calculate the dollar value of a premium. As a specific example, a trader who buys a $1,000 August gold call at a premium of $50 pays $50/oz ($5,000 per contract) for the right to buy an August gold futures contract at $1,000 (regardless of how high its price may rise) at any time up to the expiration date of the August option.

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