Underlying futures contract

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Underlying futures contract

A futures contract that supports an option on that future, which is executed if the option is exercised .
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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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Options on futures are traded at each of the futures exchanges and are standardized just like the underlying futures contracts. Options on the physicals are nonstandardized, just like typical forward contracts.