A put option is the right to sell at the strike price chosen. The price of a put option is based on the intrinsic value (strike price minus the current price); never below 0) and the time value(time left to expiration).
Intrinsic value example: A put option with a strike price of $6.00 and futures price is $5.75. The intrinsic value is $.25. A time value example: A put option with a strike price of $6.00 and futures price is $6.10. The time value is $.10 for a simple explanation (there are other factors at play such as the volatility factor but is not explained here).
Why buy a put?
- Protect current price but leave upside open
- Offset risk in a long future position or your current grain inventory.
- Adjusting other option positions.
Why sell a put?
- Collect premium.
- Offset risk in another strategy (put spreads, etc.).
What are the risks of puts?
- Buying a put: losing investment premium paid for the put
- Selling a put: unlimited risk
When to use puts?
- That is the question. Learn the ins and outs of options and have a system that helps determine when to enter positions and a plan on when to enter each strategy and how to adjust it as the market moves.
Call us if you want help to learn options and how to use them in your marketing plan.
