Question

When is it best to use a put option vs. a futures contract?

Answer 1

A put option would be best used in the general circumstance of expecting a price to fall. A call option would be best used in the general circumstance of expecting a price to rise. Both options are used as tools to mitigate price volatility in either direction and are futures contracts.

Answer 2

The basis for using a option over a futures contract is that this type of derivative provides the opportunity to benefit from upside potential where with a futures contact you are effectively hedging against the risk of adverse movements in the underlying hedged item but you also lose any chance of upside benefit in the event of a favourable movement. Of course it would seem sensible to always use options as this provides a win win situation however the downside to options is their cost. They are very expensive when compared to futures due to the costly premium which must be paid regardless if you exercise the option or not. In the case of futures you will only settle or receive the variance from grant value to settlement value and as such if the futures contract exactly hedges the risk there will be no cost as the adverse movement in the hedged item will be off set by the gain in the hedged item. In terms of speculation; with options you stand to lose your committed up front premium if your bet does not pay off and the option lapses where with futures you stand to lose to the extent the futures price moves adversely however you can always sell the future assuming it is of a publicly traded type.