There are two types of options: Calls and Puts.

      A call gives the holder (buyer) of the options contract the right, but not the obligation to buy the underlying futures contract. People who buy calls are forecasting that the price of the underlying futures is going to go up, so they can buy low and sell high. Conversely, a put gives the holder the right but not the obligation to sell the underlying futures contract.

      The price at which the underlying futures contract may be bought or sold is the exercise price, also called the strike price. Several puts or calls at different strike prices will be available for a particular underlying futures contract. For example, there may be September CME S&P 500 call options at 1410, 1420, 1430, and so on.

      An options contract affords the right to buy or sell for only a limited period of time. The expiration date of an option is the last day the option can be exercised or offset.

      The writer of a call incurs an obligation to sell a futures contract and the writer of a put has an obligation to buy a futures contract. In return for the rights they are granted, options buyers pay options sellers a premium.

      CALL

      Option Buyer

      • Purchased the right to buy the underlying futures contract at the specified price on
        or before the defined date.
      • Call option buyer anticipates prices to rise in the underlying futures contract.

      Option Seller (writer)

      • Grants the right to the buyer, therefore has the obligation to sell the futures contract at
        a predetermined price if the buyer chooses to exercise the call.
      • The expectation of the call option seller is that prices will remain neutral or decline.

      PUT

      Option Buyer

      • Purchased the right to sell the underlying futures contract at the specified on
        or before the defined date.
      • Call option buyer anticipates prices to decline in the underlying futures contract.

      Option Seller (writer)

      • Grants the right to the buyer, therefore has the obligation to buy the futures contract at
        a predetermined price if the buyer chooses to exercise the call.
      • The expectation of the call option seller is that prices will remain neutral or rise.

      An options contract is a depreciating asset. It has an initial value that declines, or wastes away, as time passes. Depending upon the movement of an options price, the buyer will choose one of three alternatives for terminating an options position:

      • Exercise the options contract.
      • Liquidate it by selling it back on the Exchange.
      • Let it expire.

      While liquidation is the most common choice, a small percentage of buyers choose to exercise their options, particularly if their strategy calls for acquiring a long or short futures position at the strike price. The ability to trade in and out of positions is the great advantage of standardized options contracts.

      If the futures price does not move far enough for an exercise to be worthwhile, or moves in the opposite direction, buyers can simply let their options contract expire worthless.

      Because trading on the Exchange is conducted among anonymous counterparties, when an options contract is exercised, the Exchange randomly assigns an options writer to fulfill the obligation.

      As in the futures market, options trading takes place in a primarily open outcry auction market on the Exchange. While the value of futures is tied to the underlying cash commodity through the delivery process, the value of an options contract is related to the underlying futures contract through the ability to exercise the option.

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