Can futures options go negative?

The head of the commodities exchange company said that futures contracts have always been allowed to trade negative and expose investors to unlimited losses, and that the CME Group does not try to attract retail investors who may not know the rules.

How are options on futures settled?

In general, if a futures option has the same expiration month as the future itself, then the contract settles into cash. If the options and futures expire in different months, then the options contract will settle into futures.

What is premium in futures and options?

An option premium is the current market price of an option contract. It is thus the income received by the seller (writer) of an option contract to another party.

What happens when a futures option is exercised?

When a put is exercised, the buyer will sell (go short) the underlying future to the assigned put seller at the strike price, no matter how low its current market price may be. A call or put’s strike price is a standardized specification of the option contract, and is set by the exchange.

What happens when a futures contract goes negative?

The fact that a futures contract has a negative price does not mean the market is not functioning correctly. To the contrary, when supply and demand are that far out of equilibrium, the futures market would not be functioning correctly if it did not show a negative price.

Are options on futures cash settled?

An option on a futures contract gives the holder the right, but not the obligation, to buy or sell a specific futures contract at a strike price on or before the option’s expiration date. Most options on futures, such as index options, are cash settled.

How is it possible to have a future based on the S&p500?

S&P 500 futures are a type of derivative contract that provides a buyer with an investment priced based on the expectation of the S&P 500 Index’s future value. Investors can use S&P 500 futures to speculate on the future value of the S&P 500 by buying or selling futures contracts.

Why is option premium paid?

An option premium is the price that traders pay for a put or call options contract. When you buy an option, you’re getting the right to trade its underlying market at a specified price for a set period. The price you pay for this right is called the option premium. Instead, you’ll put down margin.

What happens when options on futures expire?

Futures options will expire into cash when the options and futures expire in the same month. If the options and the future expire in different months, the options settle to the future.

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