In an options hedge, gains are only reduced by the premium paid - unlike a futures hedge, where gains in the cash market are more wholly offset by futures market losses. In exchange for the premium, writers assume the risk of being assigned a position opposite that of the buyer in the underlying futures market at any time prior to expiration. Writers of call options must be prepared to assume short positions at the option's strike price at the option holder's discretion, while put option writers may be assigned long futures positions. Writing put and call options can serve as a source of additional income during relatively flat market periods. Because option writers must be prepared to enter the futures market at any time upon exercise, they are required to maintain a margin account similar to that for futures positions.
Sellers can offset their positions by buying back their options in the market.
Strike Prices Traders agree on premiums in an open outcry auction similar to that for futures contracts. As futures prices rise or fall, higher or lower strike prices are introduced according to a present formula. Premiums A number of factors impact premium levels in the market. Intrinsic value is the dollars and cents difference between the option strike price and the current futures price. Time value reflects a buyer's anticipation that, at some point prior to expiration, a change in the futures price will result in an increase in the options value.