Thinking about taking your options knowledge into the world of futures? Keep these differences in mind as you get started.
If you’re considering new ways to take advantage of market movement, futures options can provide your futures trading with much of the same flexibility and leverage that equity options do for your equity trading.
Refresher: futures are tradable financial contracts tied to physical products, including corn and oil, or financial instruments, including the S&P 500 (SPX).
The same fundamental equity options concepts usually hold true with futures options: they have expiration dates, can be exercised, and are sensitive to both time and volatility. Futures options can be traded in the same types of spreads that apply to equity options, allowing for strategies that can be bullish, bearish, range-bound, strongly moving, or time-based.
On the other hand, some of the attributes that make futures different from equities also introduce peculiarities to futures options. You need to keep these differences in mind if your trading is to be effective.
(If the world of options in general is new to you, look at some of our educational content on equity options for a better grounding.)
The first thing to remember, and perhaps the most important, is that a futures option is a contract based on another contract (the future itself). Unlike equities, futures have a discrete expiration date (also known as a delivery date). At any given time a futures root, say “/ES” for example, could have several different actual futures contracts expiring at different times, such as “/ESU5”, “/ESZ5”, and “/ESM6”.
Every futures option gives you the right or obligation to buy or sell one of these specific futures contracts, so it’s critical to keep track of them.
Okay, we’re making a little joke about commodities delivery. But, seriously, product delivery comes into play with futures options.
Your second point to consider is the different standard deliverable for a futures option (i.e., what the option contract delivers on exercise or assignment). On the upside, non-standard futures option deliverables essentially do not exist.
All futures options available at TD Ameritrade have the same deliverable: a single futures contract per futures options contract, as opposed to an equity option, which typically has a deliverable of 100 shares. However, futures options often have more or different available expirations than your standard optionable equity, including some end-of-week and end-of-month expirations. When you are in the thinkorswim® platform, pay close attention to the option series’ header bar, which contains all its expiration and specification data (figure 1).
FIGURE 1: RESPECT THE CALENDAR. Following expiration closely can be critical to successful trading in options futures. The good news is that the info is there if you know where to look. For instance, once you pull up a futures contract options chain, you’ll see a series of tickers (in our example: /ESUS) including any non-standard expirations (Wk2, Wk4, and so on). To the far left of that ticker, you’ll find the series’ expiration, followed in parentheses by the number of days left until expiration. And at the far right, the percentage reading shows the implied volatility of the contract, and in parentheses, the implied price move on the underlying contract. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Finally, the margin requirements for futures options can be considerably different from those for standard options—even though the concepts of price, time, and volatility all still apply. Margin is the deposit required as security on a brokerage account.
Unlike equity options in a regular margin, or “Reg-T,” account, options on futures are evaluated on a “potential risk” basis. That means your overall position for an underlying future (and all associated options) is stress-tested against several different sets of potential price and volatility movements to determine the margin requirement for the position you currently hold.
Adding to or removing from that position will change that requirement based on how those changes affect those potential moves. This is similar to, but not the same as, how margin is calculated in a risk-based equities account. Having a good grounding in risk analysis and options pricing theory is strongly recommended, particularly if the strategies you prefer utilize multiple different options contracts on a single future.
Advanced traders and aspiring traders looking to up their game might consider these alternative products. The point is, these markets share similar vernacular, but some of the vital, underlying mechanics look a little different once you jump in.
There are a few account requirements you’ll need before diving in. A margin account with full options and futures approval is required (sorry, no IRAs). If you have full options approval and a margin account when you apply for futures, futures options approval will come with that automatically, assuming you’re approved for futures trading.
If you already have a futures account, but not full options and margin approval, those will have to be applied for separately. All of the relevant requests can be made on TD Ameritrade’s website.
If you’re a client, log in with the user ID of the account you want to request approval for, click on “Client Services” in the top navigation menu, and choose the General section of “My Profile.” Links to all approval requests are listed under the “Elections & Routing” section there.
Not all futures contracts tradable at TD Ameritrade have options available; price quotes are available only for some. In most cases the unavailable options have relatively low volume, low open interest, or wide pricing spreads that could prove excessively risky.
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Spreads, Straddles, and other multiple-leg option strategies can entail substantial transaction costs, including multiple commissions, which may impact any potential return. These are advanced option strategies and often involve greater risk, and more complex risk, than basic options trades.
Futures and futures options trading is speculative and is not suitable for all investors. Please read the Risk Disclosure for Futures and Options prior to trading futures products.
Options on futures are not suitable for all clients and the risk of loss in trading futures and options on futures could be substantial. Additionally some options expire prior to the final settlement or expiration of the underlying futures contract. Option writing as an investment is absolutely inappropriate for anyone who does not fully understand the nature and extent of the risks involved and who cannot afford the possibility of a potentially unlimited loss. It is also possible in a market where prices are changing rapidly that an option writer may have no ability to control the extent of losses.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
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