Options on Futures
Mar 24, 2016
By: Sage Anderson
Today we are building on a recent blog post that helped clarify the difference between options and futures.
For those already up to speed, let’s step up the game and take a look at options on futures.
Previously, we indicated that the main difference between futures and options relates to obligation. A buyer of futures is obligated to own the underlying asset, whereas options owners have the right, but not the obligation, to own the underlying asset.
Given the above, we can derive that an option on a future consequently provides the owner with the right, but not the obligation, to own a future.
For those that have previously traded equity or index options, there are some key differences between options on equities and options on futures that need to be noted.
In terms of availability, options on equities are traded on multiple exchanges (CBOE, BOX, etc...). Options on futures work very differently.
The futures exchange that owns a particular product will also be the only one that offers the associated options. The fact that options on futures are offered on only one exchange can therefore affect the volume, bid-ask spread, and overall competitiveness of the product.
The concept of multipliers is another area where traders of options on futures need to be aware of differences.
In equity options (index and single-stock) the standard multiplier is 100. A single options contract represents 100 shares of stock. Therefore, 10 equity option contracts equate to 1,000 shares of stock (10 x 100 = 1,000).
In the world of futures, the option multiplier varies by product.
To help reinforce this difference, a recent episode of Closing the Gap - Futures Edition walked viewers through the multipliers of several commonly-traded futures products, including the S&P 500 (/ES), oil (/CL), and the Euro (/6E).
In this episode, Mike Hart (aka "Beef") joins hosts Tom Sosnoff and Tony Battista to provide a more detailed explanation of multipliers.
Due to the relative complexity of this subject, we are keeping things as simple as possible by highlighting the multipliers of only /ES and /CL in this post:
The first line in the table above represents the price of the option traded for each product (a value dictated by the market on any given day). The second row contains the multiplier for the futures option contract in question.
Lastly, the dollar amount of premium bought or sold is calculated by multiplying the price of the option times the multiplier.
For the purposes of comparison, the dollar amount of premium bought or sold for an equity option is calculated in a similar manner. The value of the option is multiplied times 100 (the multiplier) and the number of contracts. So if you sell one equity options contract for $0.50 then you receive $50 ($0.50 x 100 x 1 = $50). That means 100 contracts would equate to $5,000 in premium ($0.50 x 100 x 100 = $5,000).
In the case of options on futures, the same calculation must be performed: contract price x contract multiplier x number of contracts.
Referring back to the slide above, 100 option contracts in /ES represents a notional value of $290,000 ($58 x 50 x 100 = $290,000).
These two examples help illustrate the fact that the notional values for options on futures tends to be much greater than in equity options.
Traders seeking more information about options on futures can watch the full episode of Closing the Gap - Futures Edition to learn more on the subject.
If you have any questions or feedback, we hope you will reach out at firstname.lastname@example.org.
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
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