Question

TOTTUTTOTT SIIT TOYOTT OTTI OTTA Ted (9) Compare the benefits and costs of buying a call option versus buying in the futures market when trying to protect against the risk of price changes in the underlying security.

Answer 1

Benefits of Buying a call option over futures:
1. The risk tolerance level is reduced.
2. There is a benefit of Market Volatility. Options price grows with Volatility. Futures have a risk with volatility.
3. The option holder already knows his maximum loss- That is the option premium paid. Whereas the loss in case of future contract can be predicted with certainty & can be very have high - as high as Underlying security strike price.
4. Options contract trade in a wide variety of stocks & assets than compared to future contracts.
5. The options have generally more liquid market than compared to futures.
6. With high volatility of underlying asset: Option contract either loss small or gain big. Whereas Future Contracts loss BIG & gain Big.