Chapter 02 · Section 2.1
Price Protection
FUTURES PURCHASED OPTIONS
Risk (potential loss) Unlimited Limited
Margin Calls Daily settlement None
Hedging Strategies Unlimited multiple
Price Protection ..... .....
With exchange-traded options, price protection can be achieved by:
a) setting a particular floor or ceiling price.
b) "locking-in" at a specific price.
If you hedge by buying an option, it is possible that you will not need the option because the price moved in favour of your hedged position. If that is the case, your loss on the option is limited to the premium paid.
If you hedge with futures, however, a gain on your hedged position will be more or less compensated by a loss on the futures position.