B. Discuss the basic fundamentals of hedging future prices with put options. C. Review the advantages and disadvantages of put options. It allows a price floor with no margin deposits and the potential to benefit from higher prices for the cost of a premium. With price fluctuations increasing, put options provide financial protection in managing price risk. The put as a forward price hedge improves leverage in obtaining credit, assists in production planning, and is helpful in increasing income.
Put options are like an insurance policy.
Once the premium is paid, the buyer has no further obligation. The option buyer may allow the option to expire, make an offsetting transaction, or exercise to take a position in the underlying futures contract at the strike price selected. Put options are for a specific underlying futures contract month. It has an expiration date and a selected exercise or strike price. All futures and options contracts traded are cleared through a commodity clearing corporation which guarantees the performance of each contract.