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Buying a Put

  • The buyer bears the right, but not the obligation, to sell futures at a specific price (strike price) after paying a premium to the seller.
  • Allows the seller of a physical commodity to establish a price floor for product he intends to sell later.
  • Protects against lower futures prices.
  • Allows for price flexibility – After buying the put, if markets should rise prior to selling the physical commodity, the owner of the put receives the higher market price for the product he is selling. After buying the put, if markets would move lower, the owner of the put is shielded from the lower futures prices by the gains in the put option.
  • No margin requirement or further costs.
  • Limited Risk (amount of premium paid plus brokerage fees); Limited Reward (futures markets cannot go below zero).