Position
Buy a Put Option
Margin Requirement
No, pay premium
Advantages
- Minimum futures price is established
- Higher futures price may improve your selling price
- Flexible, offset at any time and receive the remaining value
- Maximum flexibility for adjustments to both higher and lower prices
Disadvantages
- Premium paid in full at time of purchase. Can be substantial for ATM or ITM put option
- Most expensive option strategy alternative
When to Apply
- If downside risk is undefined or hard to define
- If flexibility to participate in all higher prices is necessary
- If capital constraints require maximum pre-defined margin exposure
- If low implied volatility environment historically and/or seasonally
Potential Adjustment
- In a rising market, roll put up to a higher strike price, and or sell higher strike call against position to capture benefit from increase in price
- In a falling market, roll put down to a lower strike, and/or sell lower strike put against position to help offset initial cost by creating a credit