Position
Sell a Put Option
Margin Requirement
Yes, must post variable margin similar to futures in a falling market
Advantages
- Lowers buying price in stable market
- Some upside protection
- Flexible, offset at any time
Disadvantages
- Can’t benefit from lower futures price
- Upside protection limited to premium sold
- Offsetting before expiration will change the cost & P/L (potential increased cost to buy back in a falling market)
- Capital expense of potential margin exposure
When to Apply
- In a stable market environment or when risk to both higher and lower prices perceived to be limited
- If strike price of short put option represents a target purchase price that fits into budget or operating margin
- In a high implied volatility environment historically and/or seasonally
Potential Adjustment
- In a rising market, buy back put option to capture decay in premium, and/or roll up short put option to generate additional credit
- In a falling market, roll down put option to lower strike price to extend range of opportunity to benefit from falling prices