What is one of the functions of options in commodity trading?

In commodity trading, options serve distinct purposes, and one of their core functions is to grant the right to buy or sell an underlying asset at a predetermined price within a specified timeframe. This flexibility allows traders to manage their risk exposure without the obligation to execute the transaction, which differentiates options from other derivatives like futures.

By purchasing an option, a trader can benefit from favorable price movements while limiting potential losses to the premium paid for the option itself. This characteristic is particularly valuable in volatile markets, where prices can fluctuate significantly. The use of options enables traders to hedge against adverse price changes or to speculate on future price movements with a predefined risk.

Other choices describe functions that either misrepresent the nature of options or do not accurately capture their specific role in trading. Options do not create a mandatory obligation to sell; instead, they provide an optional choice. They also do not eliminate risk entirely, as they involve a premium that can lead to losses if market conditions do not favor the option holder. Finally, while options can be related to futures, they do not directly modify futures contracts; instead, they exist as separate instruments that can complement futures trading strategies.