Explain the difference between a put option and a short position in a futures contract.

Expert Solution

Put option gives the holder or buyer of the option a right not the obligation to sell the underlying asset or stock at a specific price known as exercise or strike price. e.g. Assume you own a stock A and a put option on the stock with strike/exercise price of X. This put option gives you to right to sell the stock A at price of X if the price of the stock falls below X. The person who purchases such option is known as buyer or holder of Put Option and the person who sells such option is know writer of the option. Writer of the put option is under obligation to purchase the underlying stock if the buyer of the Put Option exercises its right to sell.
The short position in futures contract is the position that can be entered by the person to earn profit from a fall in the price of the underlying. The short futures position is also used by the holder of the stock or asset to lock in a price of such as asset or commodity.

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