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).
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