Options on futures

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Options on futures did not evolve until 1982, after a 50-year ban in the United States, when the Chicago Board of Trade launched the first options on futures contract for U.S. Treasury bond futures. Securities options preceded them by nine years when the Chicago Board Options Exchange opened in 1973.

Today, the majority of, but not all, futures products (commodities, interest rates, foreign currencies, equity indexes, metals, energy, and others) also list a futures options product.

The mechanics behind options on futures (or futures options) are the same as those behind equity options; they merely have different instruments underlying them.

A futures options contract gives the buyer the right -- but not the obligation -- to buy or sell a specified quantity of a commodity or a futures contract at a specific price within a specified period of time. The seller of the futures option has the obligation to sell the commodity or futures contract, or buy it from the option buyer at the exercise price if the option is exercised.

There are two basic types of options exercise: American-style and European-style.