Put options at a given strike price cost less (or more) in a rising (or falling) market because the the put option gives the right to have sold the underlying futures contract at a specified level.  The example above looks back at the performance of a $1.20 put option on the expired Dec’22 futures contract.  This option had intrinsic value when the underlying futures was below $1.20, like it was during the last half of 2022.  Therefore, put option premiums move opposite of the direction of the underlying futures price.  This is important because an increasing put option premium can act as an insurance payment against falling futures and (assuming a stable cash basis) falling cash prices.

Back when Dec’22 was trading at 120.10 cents per pound, the associated premium for a $1.20 put option was 10.41 cents per pound.  Buying it at that level was essentially buying the right to a 109.59 cent short futures position.  This implied a minimum cash price around 105 per pound with upside potential and no margin call exposure.  Looking back, there were several opportunities in 2022 to buy affordable and meaningful put options. 2022 was unusual in that we saw two major declines of roughly 50 cents each in five months.  This at least provides more awareness of the scope of downside price risk.

Looking ahead to 2023, meaningful hedges with put options on Dec’23 ICE futures are currently too expensive to consider.  For example, a 90-cent level put option on Dec’23 cost 13.97 cents as of March 23, 2023.  That implies a short hedged futures position of 76.03 cents per pound, which is impractically low and prohibitively expensive.  But if there is a big rally in Dec’23 futures, such strategies may become affordable, so they bear watching.