This graph shows daily settlement prices for Dec’08 futures from about fourteen months out through expiration (red line). The blue and green lines show the premium value associated with 70-cent put and call options, respectively. This year saw unprecedented price volatility, the inexplicable price spike in early March, and a dramatic price decline (in concert with all commodities) in the summer/fall. Major hedging opportunities were available provided the option markets were operating normally (which they weren’t in early March). The post-spike volatility resulted in a large increase in option prices. Still, an inexpensive put option in mid-April would have paid huge dividends in the event of the price decline (which most people did not see coming… that’s why the put option was so inexpensive in mid-April). This is an example of how a relatively inexpensive put option works as an insurance strategy against a very unpredictable outcome (i.e., external market forces driving down all commodity markets). This example is similar to the 2004 case, except perhaps the price decline of 2004 was a little more predictable (but still ultimately uncertain).