Futures Options Pricing

Many traders who understand futures trading have a hard time understanding futures options. This is because the pricing of the options is sometimes different for the futures option contracts compared to the futures contracts.

For example, the 30 year t-bond futures contract has 32 ticks for each point in t-bonds. Each tick is worth $31.25. Now the options have 64 ticks in every point. Each tick in options is worth $15.625. See how this can be confusing. Not every market is like this. The financials have markets like this as discussed with bonds and also the grains.

For instance wheat futures are priced at $50 per cent. Each tick is ¼ cent. So each tick in wheat futures is $12.50. In the options market there are 8 ticks in each cent. So each tick is 1/8 cent and each tick is $6.25. We purchase or sell options while looking at the underlying contract. The underlying contract might be priced differently so that is why it can get confusing.

Keep this is mind when buying or selling any option. You will notice the prices are different if you check the quotes in the futures market compared to the options market.

For bonds I might see that bonds are priced at 115-31. I then look at an option and it is priced at 1-32. Now you will notice that bonds are never priced above -31 because there are 32 ticks and the next tick after 31 ticks is one point. So after 115-31 the next price is 116. In bonds options as we have seen, the price of the option can go from 1-31 to 1-32 because there are 64 ticks in every point in the bond markets.

For wheat you will see futures at 5546 which is 554 and ¾ or 554.75. Three quarters is the highest price for futures ticks. You might see an option contract for wheat priced at 9-7 which is 9 and 7/8 which is 9.875.

So remember this when you are comparing futures options prices with futures prices.