OK, I know I should know this, but search didn't yield any results. And I stopped after the 5th set on pages on Google. So the question is, what the the options priced off? Cash or futures? Take the ES options for example. What is the NOV series priced off? As you know there is no NOV ES contract. Also, at expiration, what will the NOV option series be priced off? As a side note, my understanding so far is that the only difference between a equity and future option model is that in futures the interest rate is set to 0. Is there anything I am missing that is of importance?
Options are priced on the futures, not the cash market. Nov expiration is a SERIAL option expiration of the December futures contract. Whatever the Dec ES contract is on Nov expiration is what the Nov options will settle at. Serials can get pretty complicated. In Eurodollars, for example, you can get a Nov serial on the Dec contract as well as a Dec '06 serial on the Dec '07 contract. The latter are called mid-curves. In many other futures, serials are barely traded, only the options which directly expire at the same time as the futures contracts are active. As for pricing of futures options--take a look at Black. http://en.wikipedia.org/wiki/Black_model
FULLY ARTICULATE What a great question and answer. That got me thinking that I can always learn. Thanks