479
AN INTrOduCTION TO OPTIONS ON FuTureS
between the futures price and the strike price were less than the premium paid for the option, the 
net result of the trade would still be a loss. In order for the call buyer to realize a net profit, the dif-
ference between the futures price and the strike price would have to exceed the premium at the time 
the call was purchased (after adjusting for commission cost). The higher the futures price, the greater 
the resulting profit. Of course, if the futures reach the desired objective, or the call buyer changes his 
market opinion, he could sell his call prior to expiration.
4
The buyer of a put seeks to profit from an anticipated price decline by locking in a sales price. 
Similar to the call buyer, his maximum possible loss is limited to the dollar amount of the premium 
paid for the option. In the case of a put held until expiration, the trade would show a net profit if the 
strike price exceeded the futures price by an amount greater than the premium of the put at purchase 
(after adjusting for commission cost).
While the buyer of a call or put has limited risk and unlimited potential gain,
5 the reverse is true 
for the seller. The option seller (“writer”) receives the dollar value of the premium in return for 
undertaking the obligation to assume an opposite position at the strike price if an option is exercised. 
For example, if a call is exercised, the seller must assume a short position in futures at the strike 
price (since by exercising the call, the buyer assumes a long position at that price). 
upon exercise, 
the exchange’s clearinghouse will establish these opposite futures positions at the strike price. After 
exercise, the call buyer and seller can either maintain or liquidate their respective futures positions.
The seller of a call seeks to profit from an anticipated sideways to modestly declining market. In 
such a situation, the premium earned by selling a call will provide the most attractive trading oppor-
tunity. However, if the trader expected a large price decline, he would usually be better off going 
short futures or buying a put—trades with open-ended profit potential. In a similar fashion, the seller 
of a put seeks to profit from an anticipated sideways to modestly rising market.
Some novices have trouble understanding why a trader would not always prefer the buy side of an 
option (call or put, depending on his market opinion), since such a trade has unlimited potential and 
limited risk. Such confusion reflects the failure to take probability into account. Although the option 
seller’s theoretical risk is unlimited, the price levels that have the greatest probability of occurring 
(i.e., prices in the vicinity of the market price at the time the option trade occurs) would result in a net 
gain to the option seller. 
roughly speaking, the option buyer accepts a large probability of a small loss 
in return for a small probability of a large gain, whereas the option seller accepts a small probability 
of a large loss in exchange for a large probability of a small gain. In an efficient market, neither the 
consistent option buyer nor the consistent option seller should have any advantage over the long run.
6
4 even if the call is held until the expiration date, it will usually still be easier to offset the position in the options 
market rather than exercising the call.
5 T echnically speaking, the gains on a put would be limited, since prices cannot fall below zero; but for practical 
purposes, it is entirely reasonable to speak of the maximum possible gain on a long put position as being unlimited.
6 T o be precise, this statement is not intended to imply that the consistent option buyer and consistent option seller 
would both have the same expected outcome (zero excluding transactions costs). Theoretically, on average, it is rea-
sonable to expect the market to price options so there is some advantage to the seller to compensate option sellers for 
providing price insurance—that is, assuming the highly undesirable exposure to a large, open-ended loss. So, in effect, 
option sellers would have a more attractive return profile and a less attractive risk profile than option buyers, and it 
is in this sense that the market will, on average, price options so that there is no net advantage to the buyer or seller.