Taking the temperature: Mace's Data Pull

When trading options on futures contracts, you need to understand what you are trading. Know the contract specifications, know how the futures options are priced, and the differences in expiration between the futures and options.

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Don't Ignore Skew

Schedules and Pricing

A futures option delivers one futures contract. So if you exercise a call option on the /ES, you’ll be long one E-mini S&P futures contract. In other words, the price of the option is based off the price of the /ES futures and not the cash index. Same for commodities. If you exercise a corn call option, you’re long one corn futures contract, not 5,000 bushels of corn. Also, futures prices on an index or commodity could have different prices in different expirations. For example, a March corn contract may be trading at $354.25, whereas a May corn contract may be trading at $362.50.

Size and Value

Commodities have different characteristics. And their futures contracts don’t all trade the same way. The pricing structure varies, with each traded future having different multipliers, tick values, and tick sizes (minimum price fluctuation). These differences can be confusing for an options trader who’s calculating how much premium she might pay or collect. To get a closer look, review the table in Figure 3.


FIGURE 3: CONTRACT SPECS OF SOME FUTURES CONTRACTS. Notice how these futures all have different one-point values? You've gotta know these specs if you wanna trade their options. For illustrative purposes only.

Peruse the Fine Print

Now that you know contract specs for some futures contracts, how can you trade their options? As an options seller, you want to consider how much premium you’ll collect, so get to know the point values.

Say you want to trade options on the June /ES. If the at-the-money (ATM) call options are trading at $96.50, the multiplier is $50 per point. So, the dollar amount of premium in this case would be $50 x 96.50 = $4,825.

For even more complexity, there are Treasury bonds. Bond futures trade in 32nds (1/32), and bond options trade in 64ths (1/64). How does that impact their pricing? Let’s take a look.

Say the March /ZB contracts are trading at 152'23 or 152 points and 23/32 of a point. Now look at the option chain. Say the ATM call options are priced at 2'45 or two points and 45/64 of a point. Multiply 2 and 45/64 by the point value, or $1,000, and you get $2,703 (45/64 = 0.703125 +2 points = 2.703 x 1000 = $2,703). 

In spite of contract specification differences, the mechanics of trading equity options and futures options are roughly the same. You still want to make profits and reduce risks. But you may need to modify the strategies. 

When trading futures options, you’re trading a derivative of a derivative, and that means higher leverage, or more risk exposure. It’s a kind of double whammy. So as an options seller, if you sell out-of-the-money (OTM) calls, consider the contract multipliers to determine your premiums. Also consider how much or little potential profit or risk you take on when you trade futures options.

Taking the Plunge

Unlike equity options, futures options can introduce a few mysterious twists and turns. But don’t let the differences put you off. With education and experience, you can get more comfortable over time, and you don’t need to know the specs of all futures contracts—just the ones you want to trade. To smooth the way, consider keeping a cheat sheet with multipliers, tick values, and point values handy. Above all, get inside the markets you want to trade and before you know it, all those odd prices will be as familiar as a gallon of gas.

Don't Ignore Skew

Schedules and Pricing

A futures option delivers one futures contract. So if you exercise a call option on the /ES, you’ll be long one E-mini S&P futures contract. In other words, the price of the option is based off the price of the /ES futures and not the cash index. Same for commodities. If you exercise a corn call option, you’re long one corn futures contract, not 5,000 bushels of corn. Also, futures prices on an index or commodity could have different prices in different expirations. For example, a March corn contract may be trading at $354.25, whereas a May corn contract may be trading at $362.50.

Size and Value

Commodities have different characteristics. And their futures contracts don’t all trade the same way. The pricing structure varies, with each traded future having different multipliers, tick values, and tick sizes (minimum price fluctuation). These differences can be confusing for an options trader who’s calculating how much premium she might pay or collect. To get a closer look, review the table in Figure 3.


FIGURE 3: CONTRACT SPECS OF SOME FUTURES CONTRACTS. Notice how these futures all have different one-point values? You've gotta know these specs if you wanna trade their options. For illustrative purposes only.

Peruse the Fine Print

Now that you know contract specs for some futures contracts, how can you trade their options? As an options seller, you want to consider how much premium you’ll collect, so get to know the point values.

Say you want to trade options on the June /ES. If the at-the-money (ATM) call options are trading at $96.50, the multiplier is $50 per point. So, the dollar amount of premium in this case would be $50 x 96.50 = $4,825.

For even more complexity, there are Treasury bonds. Bond futures trade in 32nds (1/32), and bond options trade in 64ths (1/64). How does that impact their pricing? Let’s take a look.

Say the March /ZB contracts are trading at 152'23 or 152 points and 23/32 of a point. Now look at the option chain. Say the ATM call options are priced at 2'45 or two points and 45/64 of a point. Multiply 2 and 45/64 by the point value, or $1,000, and you get $2,703 (45/64 = 0.703125 +2 points = 2.703 x 1000 = $2,703). 

In spite of contract specification differences, the mechanics of trading equity options and futures options are roughly the same. You still want to make profits and reduce risks. But you may need to modify the strategies. 

When trading futures options, you’re trading a derivative of a derivative, and that means higher leverage, or more risk exposure. It’s a kind of double whammy. So as an options seller, if you sell out-of-the-money (OTM) calls, consider the contract multipliers to determine your premiums. Also consider how much or little potential profit or risk you take on when you trade futures options.

Taking the Plunge

Unlike equity options, futures options can introduce a few mysterious twists and turns. But don’t let the differences put you off. With education and experience, you can get more comfortable over time, and you don’t need to know the specs of all futures contracts—just the ones you want to trade. To smooth the way, consider keeping a cheat sheet with multipliers, tick values, and point values handy. Above all, get inside the markets you want to trade and before you know it, all those odd prices will be as familiar as a gallon of gas.

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Jayanthi Gopalakrishnan is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are soley those of the author and may not be reflective of those held by TD Ameritrade, Inc.

Futures and futures option trading is speculative and is not suitable for all investors. Please read the Risk Disclosure for Futures and Options prior to trading futures products. Futures accounts are not protected by the Securities Investor Protection Corporation (SIPC). Futures and futures options trading services provided by TD Ameritrade Futures & Forex LLC. Trading privileges subject to review and approval. Not all clients will qualify.

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