Options on Futures Terminology
It's important to understand the terminology used in investing. Here are a few important terms users of options on futures should know.A call option gives the buyer the right, but not the obligation, to buy a specific futures contract at a predetermined price, within a limited period of time. A put option gives the buyer the right, but not the obligation, to sell a specific futures contract at a predetermined price within a limited period of time.
The holder is the option buyer and the writer is the option seller. Premium refers to the dollar amount paid by the buyer of the option to the seller.
The strike price is the predetermined price where a given futures contract can be bought or sold. This is also called the exercise price and these levels are set at regular intervals.
An option is "at-the-money" when the underlying futures price equals, or nearly equals, the strike price. A call option is "in-the-money" when the underlying futures price is greater than the strike price. The put option is "in-the-money" when the strike price of the option is greater then the price of the underlying futures contract. A call option is "out-of-the-money" if the strike price is greater than the underlying futures price. The put option is "out-of-the-money" if the underlying futures price is greater then the strike price.
