What does Seller’s Option mean?
It is a type of a forward contract wherein the seller has the right to choose some of the specifications of the commodity that has to be delivered. The contract entered into will carry certain limits under which the specifications put in by the seller must fall. It is also known as a “put option”. Hedgers generally tend to buy huge quantities in order to protect themselves from risk of price variation.
Futures Knowledge Explains Seller’s Option
For example, a contract may have been entered into by the parties for 50,000 quintals of a certain commodity (e.g. Wheat). Due to transportation constraints, the seller in the forward contract may restrict to the delivery of a few thousands at a time.