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?

  • $\begingroup$ Possibly over-thinking this. Most eg index, bond (not swaption) and commodity options are options on the futures. Consider Gold. Instead of taking out my option on spot bullion, or on XAUUSD in FX, I do it on the GC futures. The future will have a slightly different price today to spot; but will settle at spot on expiry. $\endgroup$ – demully Oct 5 '19 at 7:25
  • 3
    $\begingroup$ A futures price is , in your words, the predetermined strike price at which you will buy/sell the underlying asset. This price moves every day according to the marketplace view of the fair value of this strike price. $\endgroup$ – dm63 Oct 5 '19 at 16:17
  • $\begingroup$ @dm63, consider posting this as an answer. $\endgroup$ – Richard Hardy Oct 20 '19 at 10:11

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