Option and future option trading examples


To recover any or all of the premium amount the option may be sold in the marketplace if it has value. An option seller keeps the premium amount initially received whether or not the short contract is assigned. The specified price at which an underlying futures contract will change hands after an exercise or assignment is called the strike price, also referred to as the exercise price. When a call is exercised, the buyer will buy go long the underlying future from the assigned call seller at the strike price, no matter how high its current market price may be.

When a put is exercised, the buyer will sell go short the underlying future to the assigned put seller at the strike price, no matter how low its current market price may be. In the marketplace the range of available strike prices, and the intervals between them, vary depending on the underlying futures contract. There will be strike prices set above and below an existing futures price.

Additional strikes are added by the exchange if needed as the market value of a futures contract moves up or down.

September Japanese Yen futures are trading at Available call strike prices might be , , , and If the futures price rises to you might find higher strike prices of and made available. If the futures price drops to you might find lower strike prices of and made available. A call or put is at any given time either in-the-money, at-the-money or out-of-the-money, and as the market price of an underlying futures contract changes this condition is dynamic.

One way to look at this is to consider whether at any moment an option might be worth exercising. If the underlying E-mini future is trading at , the call holder has the right to go long the future 20 points less than its current value.

Is it worth exercising or not? If the underlying E-mini future is trading at , the call holder has the right to go long the future 20 points more than its current value. A call guarantees its buyer a fixed purchase price, the strike price, for the underlying futures contract, if the call is exercised. As the futures price rises that purchase price is worth more to a buyer so the call option increases in value.

The opposite is true for a call if the futures price declines. A put guarantees its buyer a fixed selling price, the strike price, for the underlying futures contract, if the put is exercised. As the futures price declines that sale price is worth more to a buyer so the put option increases in value. The opposite is true for a put if the futures price increases.

Calls and puts on the same underling futures contract with the same expiration month will have a range of available strike prices. Again, standardized strike prices are set and specified by the option contract.

The time value portion of call and put premiums decreases over time. This is referred to as time decay. The rate of decay is not linear, it increases as expiration approaches. Volatility is a function of price movement of an underlying futures contract. Precisely, it is a measurement of price fluctuation up or down, not a sustained upward or downward price trend.

Call and put buyers want more volatility and are willing to pay more premium for it. Call and put sellers want lower volatility, i.

They require more premium for the inherent risk of higher volatility levels. Many investors buy calls or puts with no intention of exercising into a long or short underlying futures position. Instead they make an offsetting transaction to take a profit or cut a loss. Offsetting a call position in no way involves a put transaction, and vice versa. Once a long position is offset a call or put buyer is out-of-the-market and no longer has rights to exercise and buy for a call or sell for a put the underlying futures contract.

Once a short position is offset a call or put seller is out-of-the-market and assignment is avoided. The seller no longer has the obligation to buy for a call or sell for a put the underlying futures contract. The information herein has been compiled by CME Group for general informational and educational purposes only and does not constitute trading advice or the solicitation of purchases or sale of any futures, options or swaps. All examples discussed are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience.

The opinions expressed herein are the opinions of the individual authors and may not reflect the opinion of CME Group or its affiliates.

Current rules should be consulted in all cases concerning contract specifications. Although every attempt has been made to ensure the accuracy of the information herein, CME Group and its affiliates assume no responsibility for any errors or omissions.

All data is sourced by CME Group unless otherwise stated. All other trademarks are the property of their respective owners. An option seller keeps the premium amount initially received whether or not the short contract is assigned.

The specified price at which an underlying futures contract will change hands after an exercise or assignment is called the strike price, also referred to as the exercise price.

When a call is exercised, the buyer will buy go long the underlying future from the assigned call seller at the strike price, no matter how high its current market price may be. When a put is exercised, the buyer will sell go short the underlying future to the assigned put seller at the strike price, no matter how low its current market price may be.

In the marketplace the range of available strike prices, and the intervals between them, vary depending on the underlying futures contract. There will be strike prices set above and below an existing futures price. Additional strikes are added by the exchange if needed as the market value of a futures contract moves up or down.

September Japanese Yen futures are trading at Available call strike prices might be , , , and If the futures price rises to you might find higher strike prices of and made available. If the futures price drops to you might find lower strike prices of and made available. A call or put is at any given time either in-the-money, at-the-money or out-of-the-money, and as the market price of an underlying futures contract changes this condition is dynamic.

One way to look at this is to consider whether at any moment an option might be worth exercising. If the underlying E-mini future is trading at , the call holder has the right to go long the future 20 points less than its current value. Is it worth exercising or not? If the underlying E-mini future is trading at , the call holder has the right to go long the future 20 points more than its current value. A call guarantees its buyer a fixed purchase price, the strike price, for the underlying futures contract, if the call is exercised.

As the futures price rises that purchase price is worth more to a buyer so the call option increases in value. The opposite is true for a call if the futures price declines. A put guarantees its buyer a fixed selling price, the strike price, for the underlying futures contract, if the put is exercised.

As the futures price declines that sale price is worth more to a buyer so the put option increases in value. The opposite is true for a put if the futures price increases. Calls and puts on the same underling futures contract with the same expiration month will have a range of available strike prices. Again, standardized strike prices are set and specified by the option contract.

The time value portion of call and put premiums decreases over time. This is referred to as time decay. The rate of decay is not linear, it increases as expiration approaches. Volatility is a function of price movement of an underlying futures contract. Precisely, it is a measurement of price fluctuation up or down, not a sustained upward or downward price trend. Call and put buyers want more volatility and are willing to pay more premium for it.

Call and put sellers want lower volatility, i. They require more premium for the inherent risk of higher volatility levels. Many investors buy calls or puts with no intention of exercising into a long or short underlying futures position. Instead they make an offsetting transaction to take a profit or cut a loss. Offsetting a call position in no way involves a put transaction, and vice versa. Once a long position is offset a call or put buyer is out-of-the-market and no longer has rights to exercise and buy for a call or sell for a put the underlying futures contract.

Once a short position is offset a call or put seller is out-of-the-market and assignment is avoided. The seller no longer has the obligation to buy for a call or sell for a put the underlying futures contract.

The information herein has been compiled by CME Group for general informational and educational purposes only and does not constitute trading advice or the solicitation of purchases or sale of any futures, options or swaps. All examples discussed are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience.

The opinions expressed herein are the opinions of the individual authors and may not reflect the opinion of CME Group or its affiliates. Current rules should be consulted in all cases concerning contract specifications. Although every attempt has been made to ensure the accuracy of the information herein, CME Group and its affiliates assume no responsibility for any errors or omissions.

All data is sourced by CME Group unless otherwise stated. All other trademarks are the property of their respective owners. Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss.