Options on Futures
Options on Futures are American Style options contracts that have their value based upon the value of an underlying Futures contract.
Whereas an Equities Option gives the holder the right to buy or sell the underlying equities at a set price at a set time in the future, the holder of a Futures Option gives the holder the right to enter into the underlying futures contract that the option is tied. Options on Futures offer the buyer the flexibility of entering into a Futures contract at a set point in the future. Options on Futures are often times used by Futures traders as a cost effective hedge to reduce the risk in their portfolio.