Danger because of unknown risks on options on futures vs. options on equities ?

Aug 31, 2008
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#1
Hi,

while trying to put on a butterfly option trade on CL future, my broker software (tos) warned me automatically that this is an unusual kind of option, and there may be possible unknown risks.

I did option trades (butterflys, condors etc. on equities (mainly ETFs) before, but never on futures. So I canceled the trade and wanted to ask first what these special future-options risks could be?

In which way way do options on ES for ex. differ from options on SPY? Where are hidden risks, the SPY options would not have?

I am thankful for any advice.
 
Jan 16, 2014
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#2
Options on futures are European style options. Meaning they can only be exercised on the expiration date if they are in the money. Don't buy these options. You could have a winning trade and not be able to exercise and then by expiration it could change in value.
 

Martinghoul

Well-known member
Feb 3, 2009
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#3
The comment above regarding the European/American option styles is ignorant and silly. The fact that the options are European doesn't make a difference for the case where you have a "winning trade". It only matters for certain cases where you're short and could be exercised early due to cost of carry considerations. It's certainly going to be completely irrelevant in almost all cases for CL options, as there are no dividends.

There are no "special" hidden risks for options on futures. Your software's automatic warning about the risks is a precaution. In general, you just need to be aware of what sort of exercise style these different options are. European/American, like I mentioned, only matters if you're short and there are dividends. The cash-settled vs physical-settled is another important aspect to be aware of, as it affects whether you will have "pin" issues. Finally, you also need to be aware of how the settlement procedure actually differs between the different options (i.e. how the settlement prices are determined).
 

A Dashing Blade

Well-known member
Jul 9, 2004
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#4
Options on futures are European style options. Meaning they can only be exercised on the expiration date if they are in the money. Don't buy these options. You could have a winning trade and not be able to exercise and then by expiration it could change in value.
First bit correct, second bit factually correct but implication that you can only get out at expiry is massively made of fail :LOL: