How Can the Use of ‘Options on Futures’ Contracts Further Enhance the Liquidity of an Underlying Asset?

'Options on futures' contracts can further enhance the liquidity of an underlying asset by providing an additional layer of trading and hedging opportunities. These contracts give the holder the right, but not the obligation, to buy or sell a futures contract at a specific price.

This attracts a wider range of market participants, including those who want to speculate on the price of the futures contract without having to trade it directly. The increased trading activity in the options on futures market can lead to more hedging and arbitrage activity in the underlying futures contract, which in turn can increase the liquidity of the underlying asset.