Futures Options Explained | American News


Options on futures contracts are a kind of contract that gives an investor the right to buy or sell futures contracts at a specific price during a specific time period.

Futures options are unique investment products because they are a derivative of a financial derivative. An options contract is a form of investment derivative that gives an individual the right, but not the obligation, to buy or sell an underlying asset. A futures contract is a form of investment derivative that allows an individual to buy or sell an asset at a predetermined price and date in the future.

Futures options, therefore, overlay the “optionality” of buying or selling something on an instrument tied to expectations of future prices instead of a direct link to current market prices.

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As many investors know, the S&P 500 Index represents approximately 500 of the largest and most successful publicly traded American companies. Futures contracts on the S&P 500 therefore allow an investor to hedge against future price declines or to speculate on the future value of this stock market benchmark.

However, the standard S&P 500 futures contract expires quarterly, and futures contracts have specific limits on leverage and margin requirements that can be onerous for large traders. So, options on S&P 500 futures contracts can be attractive because they offer additional flexibility that you won’t find only in S&P 500 futures contracts.

Futures options provide access to sophisticated investment strategies that offer lower upfront costs, deeper pools of liquidity, and more flexibility than alternative assets designed to achieve similar goals.

As with all investments, futures options are only suitable if they match your risk profile. You should only buy options on futures contracts if you understand exactly what you are trading.

In the first example of S&P 500 futures options, the vast majority of small or casual investors may not find such a product suitable if they simply want long-term exposure to the stock market. In truth, even the first layer of derivatives – futures or options alone – may not be necessary for them at all.

The multi-layered approach of futures options means that they are largely aimed at sophisticated investors who understand these products, their risks and potential costs. However, there are several billion dollars in options on futures contracts worldwide, so there is a real use case for these contracts despite their complexity.

To trade any form of options, you must be approved and hold margin in an account with an approved and licensed brokerage platform. Futures options are no different. An additional layer of approval is sometimes required beyond mainstream stock trading, but many platforms can approve or extend your access within 24 hours.

Once you have a valid account and understand the basics of placing an order, you are free to trade according to your strategy. Remember that unlike stocks, which only have one stock symbol, options on futures change based on expiration or “settlement” dates – so be sure to research what you negotiate and double-check any order before placing it.


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