Reply To: George Osborne to act against fuel surcharges

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BigDog.
Participant

Hi Openly, Puts (and Calls) are (usually off balance sheet) financial instruments – derivatives. A put option gives you the right to Sell at an agreed price anytime by a specified later date a commodity eg fuel or instrument eg rate. If the market price (in this case say fuel) goes up then you would not exercise your option as you can get a better price on the spot market. If the current market price is lower then it is best to exercise your put option as you would get a better price.

So by buying a put, you are buying a right to sell at an agreed price, by an agreed future date. As you are merely buying or selling the right as opposed to the underlying instrument/product itself, then your funds can be leveraged many times.

If the price/value of the underlying instrument starts to fall off a cliff eg $50, whilst the put you purchased gives you the right to sell at say x amount at $80 a unit, then you would have made an excellent return.

If the value had gone up to say $95 then you would let your put option lapse and the only money you have lost would be the cost of buying the option – not the underlying fuel. They allow people to speculate big time on the value of any commodity/currency/rate without having to own or intend to own said commodity/currency/rate.

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