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Rolling Up a Put Option as Prices Increase

Summary

Agricultural producers commonly use put options to protect themselves against price declines that can occur during the production year.A put option of a futures contract gives the buyer the right to sell the underlying commodity at a specified price (its strike price) for a fixed period of time (until its expiration). Whereas, a short hedge (selling a futures contract) locks in a fixed selling price, a put option allows a producer to establish only the minimum expected selling price while retaining the potential to benefit from price increases.The use of put options by “rolling up” put options helps to improve a producer’s minimum expected selling price when the price of the underlying commodity increases, while retaining the potential to benefit from further price increases.