Investments, tenth edition

  Futures Options   

Futures options give their holders the right to buy or sell a speci-

fied futures contract, using as a futures price the exercise price of the option. Although the 

delivery process is slightly complicated, the terms of futures options contracts are designed 

in effect to allow the option to be written on the futures price itself. The option holder 

receives upon exercise a net payoff equal to the difference between the current futures 

price on the specified asset and the exercise price of the option. Thus if the futures price is, 

say, $37, and the call has an exercise price of $35, the holder who exercises the call option 

on the futures gets a payoff of $2.