A “put” is an option to sell futures at a certain price. In this example the producer buys a $4.50 put for a cost of $0.20/bushel when futures price is $5.00. The buyer of the put has until expiration to decide whether or not to convert the put option into a sell or “short” futures position at $4.50/bushel. The most that the buyer of options (puts and calls) can lose is the money spent to buy the option…in this example, $0.20/bu.
Scenario #1: Futures prices continue to rise.
In this scenario, futures price continue to rise to $6.65/bu. at expiration. Since the futures price is higher than the put strike price, the producer will NOT convert to a short future. This results in a net price of $6.45/bu. (plus basis) ($6.65- $0.20 cost of put).
Scenario #2: Futures prices fall.
In this scenario, futures price turned lower and ended at $3.65/bu. This is below the $4.50/bu. (the strike price) put. The producer will convert the put to a short futures position at $4.50.
This results in a net price of $4.30 (plus basis) ($4.50- $0.20 cost).