660 Part V: Index Options and Futures 
priced or underpriced as well. The arbitrage possibilities would be calculated in a 
manner similar to that described for index futures, the futures premium versus cash 
being the determining factor. 
OPTIONS ON FUTURES 
The reader is somewhat familiar with options on futures, having seen many examples 
of index futures options. The commercial use of the option is to lock in a worst-case 
price as opposed to a future price. The U.S. businessman from the earlier example 
sold Swiss franc futures to lock in a future price. However, he might decide instead 
to buy Swiss franc futures put options to hedge his downside risk, but still leave room 
for upside profits if the currency markets move in his favor. 
DESCRIPTION 
A futures option is an option on the futures contract, not on the cash commodity. 
Thus, if one exercises or assigns a futures option, he buys or sells the futures contract. 
The options are always for one contract of the underlying commodity. Splits and 
adjustments do not apply in the futures markets as they do for stock options. Futures 
options generally trade in the same denominations as the future itself ( there are a few 
exceptions to this rule, such as the T-bond options, which trade in sixty-fourths while 
the futures trade in thirty-seconds). 
Example: Soybean options will be used to illustrate the above features of futures 
options. 
Suppose that March soybeans are selling at 575. 
Soybean quotes are in cents. Thus, 575 is $5.75 - soybeans cost $5.75 per 
bushel. A soybean contract is for 5,000 bushels of soybeans, so a one-cent move is 
worth $50 (5,000 x .01). -
Suppose the following option prices exist. The dollar cost of the options is also 
shown (one cent is worth $50). 
Option Price Dollar Cost 
March 525 put 5 $ 250 
March 550 call 35 1/2 $1,775 
March 600 call 81/4 $ 412.50 
The actual dollar cost is not necessary for the option strategist to determine the 
profitability of a certain strategy. For example, if one buys the March 600 call, he