Put-Option Floor & Protect the Downside, Keep the Upside
Floors corn
A put option gives an asymmetric floor — it protects against a price fall while leaving the upside open, at the cost of the premium. Enter the strike, premium and basis to get the net price floor, break-even market price and a put-floor vs forward-contract comparison.
Set up your put floor
Thick violet = the put floor: flat protection up to the strike, then rising 1:1. Blue = a flat forward contract. Grey dashed = doing nothing.
Next: the premium is expensive relative to the forward: the put floor of $3.99/bu is $0.31/bu below the flat $4.30/bu forward. Consider a lower (cheaper) strike to thin the premium, or take the forward unless you have a strong upside view.
Net price = max(strike, futures at expiry) + basis − premium. Floor = strike + basis − premium. Forward = forward futures + basis (flat).
Runs entirely in your browser — nothing is uploaded. Not financial advice.
Put-option price floor — key facts
- Net price floor
- strike + basis − premium
- Net price
- max(strike, futures) + basis − premium
- Floor cash price
- strike + basis
- Upside break-even
- strike + basis + premium
- Forward contract
- forward futures + basis (flat)
- Put beats forward
- futures > forward + premium
- Put advantage
- open upside above the strike
- Put cost
- the premium, paid up front
- Higher strike
- higher floor, higher premium
- Privacy
- Runs in your browser; nothing uploaded
Strike vs premium — the trade-off ladder
A higher strike buys a higher floor but costs more premium. Net floor shown for a −$0.25 basis. Illustrative figures of the magnitude a CME corn-style option chain shows around a $4.50 futures; confirm live premiums with your broker.
| Strike ($/bu) | Moneyness | Premium ($/bu) | Net floor (−0.25 basis) |
|---|---|---|---|
| $4.80 | ITM | $0.45 | $4.10 |
| $4.70 | ITM | $0.38 | $4.07 |
| $4.60 | ITM | $0.32 | $4.03 |
| $4.50 | ATM | $0.26 | $3.99 |
| $4.40 | OTM | $0.21 | $3.94 |
| $4.30 | OTM | $0.17 | $3.88 |
| $4.20 | OTM | $0.13 | $3.82 |
| $4.10 | OTM | $0.10 | $3.75 |
| $4.00 | OTM | $0.08 | $3.67 |
Source: CME Group hedging-with-options self-study guide; university extension grain-marketing options primers (net price floor = strike + basis − premium).
A floor without giving up the rally
A forward contract is simple — it fixes one price — but it is all or nothing: lock at $4.55 and a summer rally to $6.00 passes you by entirely. A put option is the asymmetric alternative. You pay a premium for the right (not the obligation) to sell at the strike, which sets a floor under your price. If the market collapses you exercise and net at least the floor; if the market rallies you simply let the option expire and sell the higher cash price. The only cost of that one-sided protection is the premium.
This tool turns those mechanics into your numbers. It computes the net price floor (strike + basis − premium), the floor and upside break-evens, the full net-price-at-various-prices table, and draws the classic payoff diagram — a flat floor up to the strike, then a 1:1 climb — against a flat forward line and a do-nothing cash line. Use it with the Enterprise Risk-Return Portfolio tool to size the risk of each crop and the Break-Even Price-Yield Matrix to set the floor that covers your cost of production.
How to use it — 5 steps
- 1
Enter the strike and premium
Set the put strike you want to protect and the premium it costs, in $/bu.
- 2
Enter your basis
Add your local basis (cash minus futures), usually a negative number.
- 3
Enter the forward alternative
Type the forward futures you could lock in now, so the tool can compare.
- 4
Read the floor and diagram
See the net floor, the break-evens and the payoff diagram against the forward.
- 5
Choose the strategy
Buy the put for a floor with open upside, or take the forward for cheaper flat certainty.
Frequently Asked Questions
What price floor does buying a put give me?+
Your net price floor = strike + basis − premium. Buying a put at a $4.50 strike for a $0.26 premium with a −$0.25 basis locks a floor of 4.50 − 0.25 − 0.26 = $3.99/bu. No matter how far the market falls, you net at least that price: if futures drop below the strike you exercise the put, and if they rise you let it expire and sell the higher cash price, in both cases minus the premium you paid.
What is the formula for the net price with a put?+
Net price = max(strike, futures at expiry) + basis − premium. Below the strike the max term is just the strike, so the net price is flat at the floor; above the strike it follows the futures price up one-for-one, less the premium. That is the asymmetry a put buys: protection below, participation above.
How is a put option different from a forward contract?+
A forward contract fixes a single flat net price — forward futures + basis — with no premium, but it also gives up all the upside: if the market rallies you are still locked at the contract price. A put leaves the upside open and only sets a floor, in exchange for the premium. The put wins in a rising market; the forward wins in a falling or flat market because you didn't pay the premium.
When does the put beat the forward contract?+
Once futures at expiry rise above the forward futures plus the premium, the put's net price exceeds the flat forward. In the worked example that crossover is around $4.81/bu futures. Below it the forward is ahead because you saved the premium; above it the put's open upside more than pays for the premium.
What is the break-even market price?+
Two break-evens matter. The floor cash price (strike + basis) is the cash price the floor maps to; the upside break-even (strike + basis + premium) is the cash price at which the open upside has recovered the premium you paid. Above the upside break-even you are genuinely better off than if the price had simply stayed at the strike.
Why is the floor below the strike price?+
Two reasons. First, you pay the premium, which comes straight off your net price. Second, you sell physical grain at the cash price, which is the futures price plus the basis, and the basis is usually negative. So the floor (strike + basis − premium) sits below the strike by the premium plus the basis. The strike is a futures-market number; your floor is a real cash number.
What is basis and why does it matter here?+
Basis is the local cash price minus the futures price — it captures freight, handling, local supply and demand, and it is usually negative inland. Because you ultimately sell physical grain at the cash price, the basis shifts your whole net price, floor and all, down (or up) by that amount. A weaker basis lowers your floor even if the option does its job, so always net the basis in.
Should I pick a higher or lower strike?+
A higher strike gives a higher floor but costs more premium; a lower strike is cheaper but protects less. The strike ladder lets you see the trade-off directly. Pick the strike whose floor covers your break-even cost of production at a premium you can stomach — there is no point insuring a price you can already live without.
Is the put premium money I lose?+
It is the cost of insurance, and like any insurance you only get it back if you need it. If the market falls, the put's protection is worth far more than the premium; if the market rises, you 'lose' the premium but you also captured the rally, which a forward would have cost you entirely. Judge the premium against the protection and the retained upside, not in isolation.
Does this work for corn, soybeans, wheat and cotton?+
Yes — the put-floor math is identical for any commodity with a futures and options market; only the price scale and basis change. Enter the strike, premium and your local basis for your crop and the floor, break-evens and the payoff diagram all follow. Use the soybean sample to see the numbers at a higher price level.
Is buying a put always the right move?+
No. If you need a guaranteed price and have no view that the market will rally, a forward contract is cheaper because you skip the premium. A put earns its keep when you want downside protection but believe — or can't rule out — that prices could rise, or when you have unpriced grain you can't yet deliver. It is one tool in the marketing kit, not a default.
Is this financial advice?+
No. This tool illustrates the mechanics of a put-option price floor with your own numbers so you can compare strategies. Option prices, basis and margin requirements move constantly and vary by broker and contract; confirm live premiums and the contract specs with your grain merchandiser or broker before trading.