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Why Puts?

We have already established in another video in this library that buying an option is much like buying insurance. In the case of puts, it is like taking out a policy on the price of a commodity that you later intend to sell. The question of why you would use a put can be answered by considering that very intention.

If, as a producer of corn, I have 100,000 bushels of expected production in the coming growing season, but I have yet to even plant the crop, I may be unwilling to forward sell all of that production, even if prices are good. In the very moment of making that decision, I have made room for the possibility of having to later sell that corn at a lower price. In other words, I as a producer, I have risk.

Buying puts allows producers to manage that risk up until the actual sale is made. In a world of extreme volatility, the put acts as insurance against bad prices, while still allowing for the possibility of higher prices.

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