Options on futures can be a liquid market; however, the multiple futures contracts that trade on any particular product can make strike selection confusing.
First we must determine the days to expiration of a trade, and then select the strike based on the correct underlying futures contract.
Checking the liquidity of the underlying futures contract is important because the liquidity of the futures contract will often dictate the liquidity of the options on that futures contract. Therefore, the active contract will most likely be the most liquid and have the most liquid options.
Make sure to select the correct delta based on the price of the futures contract you are trading. In other words, different contracts have different prices, and therefore corresponding options will have different ATM strikes.
Important notes to check on when deciding on a future option:
- Liquidity of the underlying futures contract
- True ATM strike of a particular futures contract
- Liquidity of options contracts