Understanding Option Contract Details
Understanding Option Contract Details
Contract details refer to the terms of an option contract. How an option contract gains or loses value, and therefore creates a benefit to you as the holder of the option, is dependent on key option contract details. Understanding the key contract details is essential to determining how and when an option will meet your financial objectives. Choosing the right options contract for you is dependent on your objectives. For example, if you want to protect or hedge an asset, you will need to know the contract details to determine the best fit for your portfolio; when speculating, your trading strategy might be influenced by the contract details.
Key Option Elements
Underlying
The deliverable for every CME Group option is a futures contract. This is called the “underlying instrument” or the “underlier”. Futures contracts also have an underlying product such as an interest rate, equity index, a foreign currency rate, or some other commodity.
Expiration/Maturity Date
Each option also has its own expiration or maturity date. This is the last day on which an option can be exercised into the underlying futures contract. After the expiration or maturity date, the option contract will cease to exist; the buyer cannot exercise and the seller has no obligation.
Strike Price
This is the agreed price at which a transaction will happen, if the option is worth exercising. The strike price for the option contract will determine the value at expiration.
Option Type
Option contracts fall into two categories, call options and put options.
A call option is the right to “buy” the underlying product at a predetermined price.
A put option is the right to “sell” the underlying product at a predetermined price.
Before establishing your option position, you will need to carefully consider your financial strategy and objectives. Whether you are hedging or pursuing a trading strategy, close alignment of the contract details are important to achieving desired results from your option position.