Conclusion

With an option, you pay for the possibility, the chance, the opportunity that exists that the price of the futures may move in a certain direction. The more time you allow, the more opportunity there is for the futures to move. Thus you are paying for time (time value).

Once the price of the futures HAS MOVED beyond a certain price (strike price) – well, the horse has bolted, the Insurer is in trouble and for the buyer, there is now value in the option – the Insurer will have to pay him out. This value is the Intrinsic Value. There is still the possibility that prices may move even further, thus the option has time value in addition to the intrinsic value.

When you get to the expiry date and if the futures closes beyond the strike price, then there will be a transaction in the futures market – someone will buy the futures and someone needs to sell – (you need two to tango). Who buys and who sells is simply guided by the type of option. For a Call option, the insured party, the buyer, will buy the futures, the seller of the option has to sell the futures. For a put option, the buyer of the option will sell the futures, by necessity the seller of the option has to buy the futures.

It all happens automatically, but only after the close of business – but please be careful if the close of business falls on a weekend!