I feel I am fundamentally misunderstanding something when it comes to options on futures. On the bottom of page 98 of 2nd edition Option volatility and Pricing by Natenberg he says:

"In the US, options on futures are subject to stock-type settlement, while outside the US, options on futures are usually subject to futures-type settlement. In the latter case, no money changes hands when either the option or the underlying futures contract is traded. Consequently, interest rates become irrelevant"

So there are several things that are unclear to me about this statement. He seems to suggest that when future-type settlement is used for future options, a future options contract can be entered into without any cash changing hands. But how does that make sense? I obtain an options contract which gives me a right but no obligation without paying for the priviledge?

Also, what does future-type settlement mean for options? In my understanding it is the following: If tomorrow the intrinsic value of my option increases, then I receive a credit and the party who is long the option incurs a debt. And so on, where each day the difference is settled. But then doesn't this mean that changes in the interest rates do affect futures--type settled future options, as receiving a debt or credit tomorrow will hurt differently depending on the interest.

I think these are likely noob questions, I hope someone can clear up the confusion for me.


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    $\begingroup$ @nbbo2 I see, but when we take an option on a future, that certainly should have monetary value right? I.e., I should pay someone to obtain an option on a future right? $\endgroup$
    – Slugger
    Commented Dec 21, 2022 at 14:19
  • $\begingroup$ Since I am not familiar with options on futures at European futures exchanges, I am going to delete my comment which was based on US exchanges only. Sorry, I will read question more carefully next time. $\endgroup$
    – nbbo2
    Commented Dec 21, 2022 at 15:46
  • $\begingroup$ This answer should, from a theoretical point of view, give you a partial answer why we don't "buy" futures and why interest rates don't matter. On the option part I cannot comment since I am not familiar with the US/European conventions and with Natenberg's book. BTW I think these are not noob questions at all. Darrell Duffie is afaik the only theoretician who went to the bottom of this. If not he must have been the first. $\endgroup$
    – Kurt G.
    Commented Dec 22, 2022 at 9:18
  • $\begingroup$ @RichardHardy Ah that was sloppy of me, I mean options on futures. Thanks for letting me know of the error $\endgroup$
    – Slugger
    Commented Dec 22, 2022 at 10:27

1 Answer 1


This isn’t too tricky. First what is the meaning of futures-type settlement. It means that when you transact , no cash changes hands. This is what happens when you enter a futures contract. So if you ‘buy’ futures at 101.45, say, no cash changes hands. If the next day the contract closes at 102.00, you will see cash being added to your account. Likewise, if in Europe there is an options contract that trades at 0.30, you can ‘buy’ it without any cash changing hands. If it closes at 0.35 the next day, money moves into your account. In contrast , in the US, options contracts don’t work like that. In the US you would have to send 0.30 to the exchange , and you don’t get anything back until the option expires or you sell it. Much like a regular OTC option.

What about the comment that ‘interest rates don’t matter’. The point here is that in the US, you need a discount rate to value the option (you have invested money from now until expiration). In Europe, you do not. There’s no discounting calculation in the valuation formula of the futures-style options.


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