I would like to verify that I have a correct understanding of hedging using a put option contract.
For stock XYZ, the current price is $12.50. When I look at the options trading table, it appears that I have the option to purchase a put option with the strike price of $12 for $0.59. This makes sense, as from my understanding, I can sell 100 shares of this stock for $12, even if the shares dip below $10 by paying the $0.59 premium.
What I dont understand is why I also have the option to buy the put option contract for a strike price of $13 (higher than the current stock price). The ask price for this contact is 1.16, significantly higher than the $12 strike price option.
Why is this?