Options on futures contracts allow traders to avoid these perceived negative aspects of futures market trading. Options can be traded without posting margin money. Options allow hedgers to establish a price floor without giving up the opportunity to benefit from favorable cash price changes. An option conveys to its holder the right, but not the obligation, to buy or sell the underlying futures contract at a specified price on or before a specified expiration date. Put options convey the right to sell an underlying futures contract.
Call options convey the right to buy the underlying futures contract.
It is the price at which the holder of an option has the right to buy or sell the underlying futures contract. The price that must be paid to purchase an option is called the premium . The premium is affected by a number of factors. One factor is the volatility of the price of the underlying futures contract. In general, the more volatile the futures price, the higher the premium will be.