buy a put buy a put


What is the versatile investment tool called a "put"? How do investors use puts? Knowing how puts work and when to use them can help you decide if puts can help you.

When the stock market causes concern for investors, many shareholders start to consider the use of puts. Significant, sometimes abrupt changes in pricing can create considerable uncertainty as to future market conditions. Uncertainty in turn leads to market volatility and the need for an effective means to hedge the risk of adverse price exposure.

Options such as puts can give investors the potential to reduce risk. Options can be used to protect against adverse price moves in equity markets, commodity markets, interest rate markets, and foreign exchange markets.

For this reason, options can be an effective hedging vehicle. Today individual investors, farmers, bankers, corporate treasurers, and equity portfolio managers throughout the world can benefit from using options as risk management tools.

The primary risk management tools available to stock market participants are the flexible futures and options contracts that are designed to directly track the price movements of the S&P 500 Index. The S&P 500 Index is perhaps the most widely followed measure of stock market performance in the financial community.

One way to hedge a diversified stock portfolio is to buy puts on the S&P 500 Index. A put is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. Hedgers of diversified S&P portfolios would be expecting the puts they purchase on the S&P 500 Index to increase in value as the Index goes down, thereby offsetting the losses in their S&P portfolios. Please be aware that trading futures and options involves substantial risk of loss and is not suitable for all investors.

Read More

What is Hedging?

Hedging investments is simply the transfer of price risk. It is accomplished by establishing equal and offsetting positions in different markets. For example, the purchase of a futures contract put can hedge a portfolio of stocks.

The easiest way to understand hedging is to consider it as insurance. When investors hedge, they are insuring themselves against an undesirable price movement in their investment. This doesn't prevent an undesirable price movement from occurring, but if it does occur and the investor is suitably hedged, the negative impact of the movement is reduced. Examples of hedging can be seen every day. If you purchase auto insurance, you are hedging yourself against vandalism, collision damage, personal injuries, or other undesirable events. …Read More

How Do Investors Hedge?
Investors use hedging techniques to reduce risk and protect against potential losses to their portfolios. Investors typically hedge one investment by making another. An investment in two financial instruments with negative correlations can produce a

result where a loss in one investment is offset by a gain in another. By hedging with financial instruments known as derivatives, the two most common of which are options and futures, investors can hedge large portfolios with relatively small exposure. Read More

Why Should I Hedge?
If you’re an investor concerned about losses to your portfolio, you may want to consider hedging. Hedging is the opposite of hiding your head in the sand while hoping for the best. All investors are hoping for the best, but hedgers plan for the worst. Bear in mind, the goal of hedging is not to make money, but to protect you from losses. ... Read More

How do investors use puts?
Overview:
The buyer of a put option has the right to sell a futures contract at a specific price on or before the expiration date. S&P Index puts should rise in value if the index falls, depending on the amount of the index move. Any profit made on the puts could be used to offset a potential loss in the S&P portfolio. Investors who buy puts must understand that there is a possibility that they may lose the entire premium paid for the puts along with commissions and fees associated with the trade.

Puts and Calls
Puts and calls are separate option contracts; they are not the opposite side of the same transaction. For every put buyer there is a put seller, and for every call buyer there is a call seller.
The option buyer pays a premium to the seller in every transaction.



Put Buyers
  • Pay premium
  • Have right to exercise, resulting in a short futures position
  • Have time working
    against them
  • Have no performance
    bond requirements
  • Limited Risk
Put Sellers
  • Collect premium
  • Have obligation if assigned, resulting in a long position in the underlying futures contract
  • Have time working in their favor
  • Have performance bond requirements
  • Unlimited Risk

 

Exercise Price
Also known as the strike price, the exercise price is the price at which the option buyer may buy or sell the underlying futures contracts. Exercising the option results in a futures position at the designated strike price. Strike prices are set by the Exchange and have different intervals depending on the underlying contract. Strike prices are set above and below the existing futures price and additional strikes are added if the futures move significantly up or down.

Underlying Futures Contract:
The underlying is the corresponding futures contract that is purchased or sold upon the exercise of the option. For example, an option on a June CME Live Cattle futures contract is the right to buy or sell one such contract. An option on September CME Canadian dollar futures gives the right to buy or sell one September CME Canadian dollar futures contract.

Premium
The premium is the price that the buyer of an option pays and the seller of an option receives for the rights conveyed by an option. Thus, ultimately the cost of an option is determined by supply and demand. Various factors affect options premiums, including strike price level in relation to the futures price level; time remaining to expiration; and market volatility.

Offset
The buyer is under no obligation to exercise an option. As a matter of fact, many traders choose to offset their position prior to expiration. A trader will offset his position if he wishes to take profits before expiration or limit his losses on the downside.A buyer can offset his option by instructing his broker to sell his option before expiration. An option seller can offset his position by buying back or “covering” his short position. Options, like futures, trade on the CME floor where a market normally exists to offset options positions.

Please be advised that trading futures and options involves substantial risk of loss and is not suitable for all investors.

Why Buy Puts?

Buying puts on financial futures may be suitable for your needs. Why?

Leverage: Buying puts offers leverage. The premium paid for an option represents only a small percentage of the value of the assets covered by the underlying futures contract. Therefore, even a small change in the underying futures price can result in a much larger percentage profit or a much larger percentage loss in relation to the premium. Always remember that leverage is a two-edged sword. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains, but buying puts can limit that risk to a predetermined amount.

Limited Risk: Once a put option is purchased, the buyer's maximum risk is strictly limited to the initial amount (the premium) paid to acquire the option plus commissions and fees. Options let you adjust your market exposure and help you manage risk. Regardless of market conditions, a long put will never require a margin call.

"Staying Power": Buying puts provides "staying power". Since options have an expiration date, this means that you can continue to hold the option for the entire life of the option if you believe the market will move in your favor. This is why it is sometimes said that option buyers have the advantage of staying power. You should keep in mind, however, that options also lose "time value" as they approach expiration due to the fact that, all else remaining equal, the more time an option has until expiration, the higher its premium.

No Margin Calls: Technically, option buyers and sellers must post margin, much as futures traders do, but the margins for option buyers will never exceed the initial premium. That means no margin calls for option buyers.

No Obligation: As implied by their name, options provide buyers with a right, not an obligation, to buy or sell the underlying futures contract.

Options are versatile. They provide you with a variety of strike price alternatives and your choice of exercise style. This flexibility offers a variety of strategic choices, and, at the same time, provides opportunities to trade the broader market.

Please be aware that trading futures and options involves substantial risk of loss and is not suitable for all investors.

What are E-mini S&P 500 Puts?

An E-Mini S&P 500 put option gives the buyer the right to participate as the S&P 500 falls below a predetermined strike price until the option expires. The buyer of an E-Mini S&P 500 put has substantial profit potential in the event of a downturn in the S&P 500. An investor who purchased and is holding a E-Mini S&P 500 put has predetermined, limited financial risk.

About the S&P 500 Index:
These contracts are designed to closely track the price movements of the S&P 500 Index. The S&P 500 Index is perhaps the most widely followed benchmark of stock market performance in the financial community.

It is a market value weighted index (float-adjusted shares multiplied by stock price) of 500 stocks traded on the New York Stock Exchange, American Stock Exchange and The Nasdaq Stock Market.

The weightings make each company’s influence on the index’s performance directly proportional to that company’s market value.

 

Contracts:
The size of the futures contract is $50 (the contract’s multiplier) x the S&P 500 Index.

These contracts expire on a quarterly basis. For futures, CME Group lists five months in the March quarterly cycle.

The size of the options on futures contract is one E-mini S&P 500 futures contract.

For options, CME Group lists four months in the March quarterly cycle and two serial months.

   
Why buy E-mini S&P 500 Puts?

Buying E-mini S&P puts can hedge a diversified S&P portfolio. The buyer of an S&P put has profit potential in the event of a downturn in the S&P futures market.

Limited Risk: Once an E-Mini S&P 500 put option is purchased, the buyer's maximum risk is strictly limited to the initial amount (the premium) paid to acquire the option plus commissions and fees. E-Mini S&P 500 options let you adjust your market exposure and help you manage risk. Regardless of market conditions, a long E-Mini S&P 500 put will never require a margin call.

Buying E-Mini S&P 500 puts means no margin calls: Technically, option buyers and sellers must post margin, much as futures traders do, but the margins for E-Mini S&P 500 put buyers will never exceed the initial premium. That means no margin calls for for E-Mini S&P 500 put buyers.

Buying E-Mini S&P 500 puts provides leverage. This means if the stock index moves as anticipated, substantial profits relative to the capital invested may be realized. If the stock index does not move as anticipated, the high degree of leverage will work against you. Although the E-Mini S&P 500 put buyer's risk is limited to the premium paid, because of the leverage, a small adverse move in the S&P index can result in a substantial or complete decrease in the value of the option. This is where one of the advantages of E-Mini S&P 500 options called "staying power" becomes important.

Buying E-Mini S&P 500 puts provides "staying power". Every E-Mini S&P 500 option is good for a predetermined amount of time. This means that even if the market move you've anticipated doesn't occur as soon as you expected, or even if the market initially moves in the opposite direction, you can continue to hold the option for the entire life of the option if you still believe the market will move in your favor. This is why E-Mini S&P 500 option buyers have the advantage of staying power. You should be aware, however, options tend to decline in "time value" as they approach expiration due to the fact that each passing day is one less day in the overall life of the option.

No Obligation: E-Mini S&P 500 put options provide their buyers with an optional right, not an obligation, to sell the underlying futures contract.

Versatility: E-Mini S&P 500 options provide you with a variety of strike price alternatives and your choice of exercise style. This flexibility offers a variety of strategic choices.

What about the Risks? A determination of financial suitability is essential when it comes to options. While the risk for the buyer of an option is limited to the total amount paid for the option, because of the leverage associated with options, small market moves against a position can result in rapid losses. Please be aware that trading futures and options involves substantial risk of loss and is not suitable for all investors.


Should you trade E-mini S&P 500 Options?
Investors who trade E-mini S&P 500 options cover a broad spectrum, from conservative blue chip investors to more aggressive stock market traders. Ask yourself several important questions to see whether you share one or more of the following characteristics with many E-mini S&P 500 market participants:

• Are you looking to protect the value of a diversified portfolio of stock holdings?
• Do you often have strong opinions on the market’s direction?
• Do you have a basic understanding of equity options, and are you looking to expand your use of options?
• Are you looking to participate in the broader market without trading or holding a large stock portfolio?

If you answered “yes” to any of these questions, you may want to consider using E-mini S&P 500 options as part of your investment program.

Whether you are a trader or a hedger, one of the single most important advantages of options is that the option buyer has the potential to realize large profits while limiting risk to the amount paid up front for the option. However, while the risk for the buyer of an option is limited to the total amount paid for the option, because of the leverage associated with options, small market moves against a position can result in rapid losses. Before you incorporate options into your trading and risk management decisions, you should thoroughly investigate these instruments. The more background you have in options, the more likely you will be able to take potential advantage of these financial instruments. A determination of financial suitability is essential when it comes to options. Please be aware that trading futures and options involves substantial risk of loss and is not suitable for all investors.
Do you have a question about options?
Just provide your information below, and a licensed futures & options broker will answer your question personally right away. We will do our best to respond as quickly as we can. bat_phone


First Name  
Last Name  
Daytime Phone  
Ask us a question  
 


Get your Futures and Options Strategy Guide.
Using futures and options whether separately or in combination, can offer countless trading opportunities. The 25 strategies in this publication are not intended to provide a complete guide to every possible trading strategy, but rather a starting point. Whether this guide will provide the best strategies and follow-up steps for you will depend on your knowledge of the market, your risk-carrying ability, and your trading objectives.

Please provide the information below for immediate access to this document:


First Name  
Last Name  
E-mail  
 



Futures and options trading involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results.