Series 3: 4.1.4. Short Put

4.1.4. Short Put

On the other side of the long December corn put option is a short put. If an investor shorts the same put on corn futures, she will receive the $0.20 premium that you, the buyer, will have paid. If at expiration the price has stayed at $3.40 or risen above it, the option will expire worthless, and the option writer will pocket her premium of $1,000 ($0.20 x 1 put x 5,000 bushels). If the price of the futures contract drops below the 340 strike price, the option will be exercised, and the option writer will lose at least part of the premium she had received. Once the price falls below its breakeven of 320 (340 – 20), the put writer will begin to lose money. Since, in theory, the price of a commodity futures contract has no floor, her maximum potential loss is unlimited.