What does it mean to “Sell a Put” on a commodity, stock, or index?
This simply refers to: The selling of a put option.
A “put” option is the right to “sell.”
(Whereas, a “call” option is the right to “buy.”)
The most common example of options is in real-estate.
One buys the right, but not the obligation, to buy a property at a set price within the next so many days.
It is the same for an option on a stock or commodity.
Selling one put option on cotton at 70.00 cents/lb. gives someone else the right to sell to you 100 bales of cotton (or one futures contract on cotton) for 70.00 cents/lb. anytime between now and the option’s expiration date.
If 2.00 cents/lb. is paid to the seller of a put option, and the price of cotton goes down by 10.00 cents/lb, the loss to the put seller is 8.00 cents/lb.
Selling a put option limits the potential gain to the premium paid for the option – while the potential loss is limited as prices hit zero.
