Put option contracts specify the futures commodity and month, the exercise price, and the period of time for which the option is in effect. As with any market, there must be a buyer and seller. The premium is the only part of an option contract that is negotiated in the trading pit. The specific month, strike price, and expiration date are predetermined by the respective commodity exchange. Using Put Options for Price Protection Buyers of put options can hedge their downside price risk for a period of time and still benefit from potential price gains if the market should increase.
Options are much like an insurance policy.
The purchaser pays a premium to protect against a possible loss. Once the premium is paid, the put buyer has no further obligation. Depending on price movements, the producer can either accept or leave the guaranteed price. That is, if the price goes higher after you buy the option, you can sell in the cash market and forget about the option. But, if the market goes down, you have the price protection with the put option at the selected strike price.