Underlying futures contract

Underlying futures contract

A futures contract that supports an option on that future, which is executed if the option is exercised .

Underlying Futures Contract

In an option on a futures contract, the futures contract. The underlying futures contract supports the option; that is, if the option is exercised, the futures contract is executed. For example, an investor may buy a call giving him/her the right to buy a pork belly if the option is exercised. In this case, the pork belly is the underlying futures contract.
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A sampling of terms defined includes: active premium, aggregation, angel financing, asset allocation, backwardation, benchmark, bridge loan, capital structure arbitrage, coefficient of determination, commodity option, convertible arbitrage, deferred futures, discretionary trading, distressed debt, enumerated agricultural commodities, extrinsic value, follow-on funding, hedge ratio, interdelivery spread, long short equity, modified value-at-risk, offshore fund, piggyback registration, social entrepreneurship, systematic trading, tracking error, underlying futures contract, venture capital method, and weather premium.
A $150 call option gives the buyer the right but not the obligation to buy the underlying futures contract at $150 a barrel.
The option will only be exercised if price movements are favorable to the option buyer, that is, if the underlying futures contract would be profitable.
An option on a futures contract derives its value from the underlying futures contract, which in turn derives its value from the underlying cash, thus the name double derivative.
Options require less initial cash outlay than buying the underlying futures contract would, but they can be much more volatile.
Also traded at the exchange are options that give the right, but not the obligation, to buy or sell an underlying futures contract.
Assuming that all options are carried to expiration (no early exercise), a trader who buys the call and sells the put can always expect to end up with a long position in the underlying futures contract at expiration.
naked option writing--selling an option without owning the underlying futures contract.