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A futures contract is a legally binding agreement between two parties to buy or sell in the future, on a designated exchange, a specific quantity of a commodity at a specific price.
The buyer and seller of a futures contract agree now on a price for a product to be delivered, or paid, for at a set time in the future, known as the "settlement date."
Although actual delivery of the commodity can take place in fulfillment of the contract, most futures contracts are actually closed out or "offset" prior to delivery.
An option on a commodity futures contract is a legally binding agreement between two parties that gives the buyer, who pays a market determined price known as a "premium," the right (but not the obligation), within a specific time period, to exercise his option.
Exercise of the option will result in the person being deemed to have entered into a futures contract at a specified price known as the "strike price."
In some cases, an option may confer the right to buy or sell the underlying asset directly, and these options are known as options on the physical asset.
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