Options on Futures
Also written Option on Futures · Options on Commodity Futures · Commodity options on futures
A European commodity option whose underlying is a futures contract, so exercise devolves into a futures position opened at the strike price rather than into delivery of the goods.
In plain language
An option on futures gives its buyer the right, but not the obligation, to take a position in a commodity futures contract at the strike price. It does not give the right to buy or sell the commodity itself.
Exercise a call and you end up long the futures at the strike. Exercise a put and you end up short the futures at the strike. From there the futures position is carried, margined and eventually settled like any other futures position — in cash or by delivery, depending on that contract.
These were India's first exchange-traded commodity options. They came first because futures were already on the exchange platform under SEBI's supervision, while physical spot markets were not. Until 2019 every commodity option traded in India was an option on futures; Options on Goods followed in 2020.
How it works
Style. Only European options are permitted: exercise happens on expiry day only.
Devolvement. On exercise:
| Option position | Devolves into |
|---|---|
| Long call | Long futures |
| Long put | Short futures |
| Short call | Short futures |
| Short put | Long futures |
All devolved positions are opened at the strike price, during end-of-day processing on the option's expiry date. The option and the underlying futures carry the same lot size, so devolvement never creates odd quantities.
Timing. Devolvement happens before the futures enter their delivery and staggered-margin period. Those futures margins generally start 5 to 15 calendar days before futures expiry; if the pre-delivery margin starts at E-10, the option devolves at around E-13.
Exercise. The option's Final Settlement Price is the Daily Settlement Price of the futures that day. ITM options are exercised automatically unless the holder gives a contrary instruction in a 15-30 minute window opened after the price is set; OTM options expire worthless. The concept of close-to-the-money does not apply. Exercised contracts are assigned to short positions in a fair and non-preferential manner.
Pricing. The Black-76 variant of Black-Scholes. By put-call parity, an ATM call and ATM put on futures have the same price.
Margins. Buyers pay premium; sellers pay SOMM. In the last three days before expiry both sides pay a devolvement margin. There is no tender or delivery period margin on the option itself.
CTT. Exercise of an option on futures attracts CTT of 0.0001 per cent of settlement value, payable by the purchaser.
A worked example
A trader buys one gold call on futures, strike Rs 49,000 per 10 g, for a premium of Rs 700 per 10 g (illustrative). The underlying futures lot is 1 kg = 100 x 10 g.
On the option's expiry day the gold futures DSP is Rs 49,900. That is the option's FSP.
Intrinsic value = 49,900 - 49,000 = Rs 900 per 10 g
Per lot = 900 x 100 = Rs 90,000
Premium paid = 700 x 100 = Rs 70,000
Net on the option = Rs 20,000
The option is ITM, so it is exercised by default. The trader receives a long gold futures position opened at Rs 49,000. The Rs 900 difference to the DSP comes through as an MTM gain the next morning.
Now he holds a futures position about 13 days before that futures contract expires — with futures margins to pay and, if he does nothing, a delivery or settlement obligation ahead.
Had he wanted no futures position at all, he could have sold the option before expiry, or given a contrary instruction in the window. Compare a strike of Rs 50,000: OTM against a DSP of Rs 49,900, it simply expires worthless and he loses the Rs 70,000 premium, with no position left behind.
Why NISM asks about it
Chapter 4 (Commodity Options), section 4.2 (European options and devolvement), section 4.4.2 (Black-76) and section 4.5 (Options on Commodity Futures) in full; Chapter 7, section 7.11.6 (Devolvement Margin) and section 7.12.2 (Options on Futures); Chapter 9, section 9.4.1 (CTT on exercise). The Chapter 5 sample questions ask what a deep ITM call on futures gives its buyer on exercise — a long position in the underlying futures, not in the physical commodity. Expect the devolvement table, the auto-exercise and contrary-instruction rule, and the comparison with Options on Goods.
Common exam traps
- Exercise gives a futures position, not the commodity. A long call on futures becomes long futures; it does not deliver gold.
- A short put devolves into a long futures position, and a short call into a short one. Sellers take the opposite side of what the buyer receives.
- Positions open at the strike price, not at the DSP. The gap is settled as MTM.
- No CTM concept for Options on Futures. CTM belongs to Options on Goods only.
- ITM exercise is automatic unless a contrary instruction is given; there is no explicit instruction needed for ITM.
- ATM call price equals ATM put price for options on futures — for options on a commodity or security the call is generally higher.
- Devolvement margin, yes; delivery period margin, no. Options on Goods are the other way round.
- Options on Futures expire earlier than the related futures — around E-13 in the workbook's example — so Options on Goods, which expire with the futures, normally have the longer tenure.
Check yourself
1.For at-the-money options on futures, put-call parity implies that:
- a)The call price exceeds the put price by the interest on the strike price
- b)The call price equals the put price
- c)The put price exceeds the call price by the cost of carry
- d)Neither price can be determined without knowing the volatility
Show the answer
Answer: (b) The call price equals the put price
"In the case of Options on Futures, CALL PRICE = PUT PRICE FOR ATM OPTIONS, as the formula will be:"
When the option is at the money, F = K, so both terms carry the same discount factor and cancel exactly — leaving C − P = 0.
Option (a) is the correct answer for options on GOODS, where the parity is:
Here the spot price sits undiscounted on one side while the strike is discounted on the other, so even at S = K a gap survives: "in case of ATM, i.e. where strike price = spot price, THE DIFFERENCE IN CALL AND PUT PRICE REPRESENTS INTEREST ON THE STRIKE PRICE." The workbook's numbers: with S = K = 250 and P = Rs 4, C = Rs 7.70 and C − P = 3.70 = 250 − 246.30.
The economic reason for the difference is worth holding on to. A futures position requires no payment upfront from either side, so neither the call buyer nor the put buyer gains a timing advantage. On a spot underlying, the call buyer defers his payment while the put buyer defers his receipt — and that asymmetry is worth exactly the interest on the strike.
Parity also predicts relative levels across moneyness: call prices tend to exceed put prices for ITM and ATM calls, while for OTM calls the call price tends to be lower than the put price, as the put goes ITM.
2.As per current regulatory norms, which style of commodity options may be launched on Indian exchanges, for both Options on Futures and Options on Goods?
- a)Only European style — exercisable only on the expiry date/day
- b)Only American style — exercisable any time on or before expiry
- c)American style for Options on Futures and European style for Options on Goods
- d)Either style, at the exchange's choice for each contract
Show the answer
Answer: (a) Only European style — exercisable only on the expiry date/day
"European option: The owner of such option can exercise his right ONLY ON THE EXPIRY DATE/DAY of the contract. As per current regulatory norms, ONLY EUROPEAN STYLE COMMODITY OPTIONS ARE PERMITTED to be launched in the case of 'Options on Futures' and in the case of Options on Goods traded in the Indian derivatives exchanges."
American style, for contrast: "the options buyer has the option to exercise his right... on or before the expiry of the options contract. The owner of such option can exercise his right AT ANY TIME ON OR BEFORE THE EXPIRY DATE."
Why the other options are wrong:
- (b) American style is defined in the workbook but is not permitted for Indian commodity options.
- (c) Both types are European. Chapter 4 lists "European Options" among the fundamentals that are the same for both Options on Futures and Options on Goods.
- (d) Exchanges have no choice here. The regulatory norm fixes the style.
3.An option on goods, in a nutshell, is:
- a)Devolvement of options on futures which leads to delivery of goods
- b)Devolvement of futures on options
- c)Devolvement of futures on goods
- d)Devolvement of options on direct delivery of goods and payment thereof
Show the answer
Answer: (d) Devolvement of options on direct delivery of goods and payment thereof
(This is a sample question from the NISM workbook.)
"Options on Goods are direct options for the actual delivery of commodities. Hence, instead of devolving on Futures like in the case of Options on Futures, Options on Goods devolves into DIRECT DELIVERY OF THE COMMODITY to the call option buyers, or direct delivery of commodity BY the put option buyers, when those options are exercised at the expiry."
Option (a) describes Options on Futures — one step removed, since those devolve into a futures position which may only later lead to delivery. That intermediate step is the whole distinction between the two products.
The four devolvement outcomes for Options on Goods:
Position Devolves into Long call A buy position — payment made, delivery received Long put A sell position — delivery made, payment received Short call A sell position — delivery to be made Short put A buy position — payment against receipt of delivery A quick way to identify the product in practice: the contract symbol ends in "S" for spot (Options on Goods) and "F" for futures (Options on Futures) — as in MAIZE20MAY20CE2100S.
Where this is taught
Free preparation for NISM Series XVIRelated terms
- Final Settlement PriceThe price at which a commodity derivative is finally settled at expiry — a simple average of the polled spot prices of the expiry day and the two days before it.
- Black-76 modelThe variant of the Black-Scholes model used to price Options on Futures, which substitutes the futures price F for the spot price and discounts the whole payoff at e^(-rT).
- Contrary instructionAn instruction from the holder of an in-the-money option telling the exchange **not** to exercise it — the only way to stop an ITM contract being exercised automatically at expiry.
- Devolvement marginA margin charged equally on buyers and sellers of Options on Futures over the last three days before expiry, so that ITM positions about to become futures already carry futures-level margin.
- European-style optionAn option that can be exercised only on its expiry day; the only style permitted for commodity options on Indian exchanges, including options on futures, options on goods and index options.
- Options on GoodsA European option whose exercise devolves directly into delivery of and payment for the physical commodity, rather than into a futures position.
- Lot sizeThe minimum quantity that must be traded and, on a delivery contract, actually delivered at expiry — equal to or higher than both the trading unit and the minimum order quantity.
- Close to the moneyThe band of option strikes clustered around the at-the-money strike which, in Options on Goods, lapse unless the buyer gives an explicit instruction to exercise them.
- Staggered delivery periodThe window before expiry in which buyers and sellers holding open positions may mark an intention to give or take delivery, spreading deliveries out instead of stacking them on expiry day.
- Short Option Minimum MarginThe SPAN-computed margin charged to the writer of a commodity option, floored by SEBI-prescribed minimum volatility scan ranges so that a cheap option cannot be written on a trivial margin.
- Volatility Scan RangeThe percentage volatility movement SPAN applies when scanning a portfolio for its worst-case loss, floored by SEBI at levels that depend on the commodity type and its annualised volatility.
- Explicit instructionThe instruction an option buyer must actively give to exercise a close-to-the-money or at-the-money commodity option — without it, the option simply expires, unlike an in-the-money option, which exercises automatically.
- Contingent liability on written optionsThe entry an option seller must record for a probable commitment to buy or deliver goods on exercise, since a written option is an open-ended obligation, unlike a purchased option, which is simply an asset.
- CTT on exerciseCommodities Transaction Tax charged on the purchaser, not the seller, when an option is exercised — 0.0001% of settlement value into futures or delivery, or 0.125% for any other settlement mode.
- Futures carry effectThe reason a call on futures carries more intrinsic value than a call on goods, while a put on goods carries more than a put on futures — because before expiry the futures price sits above the spot price.