An option is a contract that gives the buyer of the option the right, but not the obligation, to buy or sell an underlying futures contract at a particular price on or before a certain expiration date.

Option buyers pay a premium up front for this right, and choose from two types of options contracts: call options, which convey the right to buy an underlying futures contract, and put options, which convey the right to sell an underlying futures contract. 

Holders of options have three choices. They can:
• Exercise the option, taking the futures position at the specified price
• Offset the option, trading the option in the marketplace at the going price
• Let the option expire, doing nothing with the option but losing the premium they initially paid

Options on futures make it possible to reduce the risks associated with buying or selling an actual futures contract while maintaining the potential to participate in the movement of the futures contract.