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I am currently studying different types of option-related derivatives and I am quite confused about the notion of “futures options”.

My textbook says that

A futures option is the right, but not the obligation, to enter into a futures contract at a certain futures price by a certain date.

My interpretation is that the difference between a futures option and a stock option is that the underlying asset now becomes the futures contract, instead of the stock. However, according to the main characteristics of a futures contract,

it costs a trader nothing (except possibly for margin requirements) to enter into a futures contract.

Therefore, what is meant by a “futures price”? A future should be a free contract under which the buyer must buy/sell an asset at a predetermined strike price in the future.

I am confused. Any ideas?

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An option contract is an agreement between two parties to buy/sell a predetermined number of shares of an underlying security at a given price (strike price) by a certain date (expiration).

Call buyers have the right to buy the security at the contract terms and call sellers have the obligation to sell the security at the strike price.

Put buyers have the right to sell the security at the contract terms and put sellers have the obligation to buy the security at the strike price.

For exchange traded options, the underlying could be a stock, ETF, futures contracts, indices, currency, bonds, or interest rates.

  • Yes. But my main problem is that unlike options, futures generally do not require an upfront payment to enter into the contract. What is meant by the "price of a futures contact"? – Richard Oct 5 at 13:37
  • So now, your issue is with futures rather than with options? While you aren't paying 'upfront' for futures contracts, you have to post margin in order to trade them. Settlement will determine P&L. The "price of a futures contact" is exactly what it says. It's the price at which the contract is trading at. – Bob Baerker Oct 5 at 16:08

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