USES FOR PUTS

1. Long puts give you bearish speculation with fixed, limited risk.

• Long a put will give you (upon exercise) the control over 1 future sold short. A long put has risk limited to the initial cost of establishing the position. • A long put has potentially unlimited gains as long as the price of the future keeps falling (all the way until zero).

2. Short hedges

The value of a put normally increases as underlying price declines- it has a bearish bias. The most protection is found with an in-the-money put because its price will move almost one-to-one with the underlying future price (but is negatively correlated). The least protection is from an out-of-the-money put, because future prices must fall a great deal before the option premium starts to move dollar for dollar with the underlying future price.

3. Protect existing long underlying position if a short-term decline is expected.

Gains in value of the put tend to offset losses in the underlying when the underlying future price falls. Since the value of the put has an inverse relationship to the value of the future, as the future value falls the put value rises. Total price for this protection is the premium paid for the put, which is known beforehand.

4. Substitute for existing profitable short underlying position if near-term rally is expected. Profitable short underlying position is closed out and a put is bought as a substitute for it. Long put position benefits in any further price decline. Maximum loss in any rally however, is limited to the premium paid for the put. Again, in absolute terms, the put that will gain/lose the most value will be an in-the-money put because its price will move inversely virtually one-to-one with the future (will increase by one point for every one point decrease in the future price).