What to Know About Trading Futures Options

Futures options can potentially offer some of the same flexibility and leverage for futures trading that equity options do for equity trading.

Futures are tradable financial contracts tied to physical products, like corn and oil, or financial instruments, including the S&P 500^® index (SPX).

Some of the same fundamental equity options concepts 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 spreads¹ 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. Here are some considerations traders should  pay attention to when trading futures options.

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, such as /ES, could have several different futures contracts expiring at different times, such as /ESU23, /ESZ23, and /ESM23. Additionally, some futures options expire prior to the final settlement or expiration of the underlying futures contract.

Every futures option gives a trader the right or obligation to buy or sell one of these specific futures contracts. 

The "/ES" in this example refers to E-mini S&P 500 futures. The letter after the root indicates the month of expiration. For example, "U" stands for September and the "Z" stands for December. Finally, the numbers represent the year. So, ESM23 indicates an E-mini S&P 500 futures contract that expires in June 2023. 

Product delivery is important with futures options. The standard deliverable for a futures option is the underlying futures contract.

All futures options available at schwab.com have the same deliverable: a single futures contract per futures options contract. This is different from an equity option, which typically has a deliverable of 100 shares of the equity in question. 

Futures options often have more or different available expirations than a standard optionable equity, including some end-of-week and end-of-month expirations. When using the thinkorswim^® platform, a trader should pay close attention to the option series header bar, which contains its expiration and other specification data.

Margin requirements for futures options are considerably different from those for standard equity options—even though the concepts of price, time, and volatility all still apply. 

Unlike equity options in a regular margin, or Regulation T (Reg T), account, options on futures are evaluated on a "potential risk" basis. That means the overall position for an underlying future (and associated options) is stress tested against several different sets of potential price and volatility movements to determine the margin requirement for the position currently held. Minimum margin requirements are set by the exchanges.

Adding to—or removing from—that position changes the margin requirement based on the way the changes can potentially impact the outcome. This is similar to, but not the same as, how margin is calculated in a risk-based equities account. Futures traders should fully understand the relationship between risk and options pricing theory, especially if the strategies preferred utilize multiple different options contracts on a single future. In general, the risk of loss in trading futures and options on futures could be substantial;  futures options are highly speculative and advanced strategies that are generally intended for more experienced and sophisticated traders with an appropriate risk appetite.

In order to trade futures options, a trader must have a margin account with full options and futures approval. 

Clients with full options approval and a margin account can apply to trade futures. Futures options approval comes automatically if and when the user is approved for futures trading. If a trader already has a futures account, but not full options and margin approval, those approvals must be applied for separately.