A futures contract is an agreement between buyer and seller of the contract to buy/sell a certain amount and quality of a commodity at a certain time in the future, unless the contract is offset. Most futures contracts are traded by speculators so the contracts are usually offset before the expiration date. Trading futures options gives the buyer the right to buy or sell a a futures contract within a certain period of time.
The decision to exercise the option and buy/sell the underlying futures contract is entirely that of the option buyer. For the privilege, the option buyer pays the option seller a premium when undertaking the deal. The premium paid can vary depending on the amount of time left until the option expires (and for the opinion of the option buyer to be proved correct so he may exercise the option for a profit) and how far the current futures market price is from the option's "strike" price.
Strike prices are those set for exercising the option. They are spaced at specified intervals from the futures price, normally in nice round numbers. For example, the February Gold 2005 futures contract is trading at 443. There are options available to buy/sell the option (using a call/put) at 445, 440, 435, 430...all the way down to 300. There are also options to buy/sell the futures contract at a price greater than the current futures price: 445, 450, 455... all the way up to 600. Different markets have different intervals, for example, the US Dollar Index intervals are in single units (80, 81, 82, 83, 84, etc.) or Crude Oil contracts are in 50 cent intervals 40.00, 40.50, 41.00, 41.50... etc.
A buyer of an option can buy or sell the underlying futures contract depending whether he thinks the price of the futures contract will rise or fall. If he thinks the futures market will go up (bullish), he will buy a call option giving him the right to buy the futures contract at a pre-specified price (the strike price) under the futures market. He can immediately offset this by selling a futures contract at the higher futures market price. If he thinks the futures price will fall (bearish), he would buy a put option giving him the right to sell a futures contract above the futures market price. He can immediately offset the position by buying a futures contract below the option's strike price.
If the underlying futures contract is near to, or at, the strike price of the option, the option is said to be "at-the-money". If the option's strike price is below the futures price, a call option is said to be "in-the-money" because if you exercised it immediately you would have the right to buy the futures contract at less than the current futures price, and therefore sell it immediately for a profit. (The fact that you could do this means that the premium paid would be high - so you wouldn't be able to exit with an immediate profit.)
If the call option's strike price is above the futures price, the call is said to be "out-of-the-money". If you exercised the option immediately, you would do so at a loss because you would have the right to buy the futures contract at a greater price than the current futures market price. In this case, the premium would be lower.
Similarly, a put option is said to be in-the-money if the strike price is above the current futures price and out-the-money if the strike price is below the current futures price.
The seller of an option is obliged to buy or sell the underlying futures contract to the buyer of the option. If the seller is bullish and thinks the futures price will go up or stay roughly the same, he could sell a put option. He if is bearish and thinks the futures price will go down, he could sell a call option.
Options are wasting assets because they have a limited time before they expire. It may be days, weeks, months, even years away. After the expiration date, the option expires worthless because you no longer have the right to buy/sell the futures contract.