The main reason to buy an option on a futures contract rather than the futures contract itself is
A) to reduce transaction cost.
B) to preserve the possibility for gains.
C) to limit losses.
D) to remove the possibility for gains.

Question

Quizplus · Accepted Answer

Buying an option on a futures contract allows the buyer to preserve the possibility for gains while also limiting potential losses. This is because the buyer has the right, but not the obligation, to exercise the option and enter into the underlying futures contract. This provides more flexibility than buying the futures contract directly, which would require the buyer to either take delivery or offset the contract before expiration. Additionally, the cost of buying an option is typically lower than buying the futures contract itself, providing a cost-saving advantage. Overall, buying an option on a futures contract can be a more strategic and efficient way to participate in futures markets.

The Main Reason to Buy an Option on a Futures