Last updated on June 30, 2022
What is Long Put?
Long Put is essentially an options trading strategy under which an investor buys the stock with an assumption that the price of the respective asset will dip significantly below the strike price until it expires.
In other words, a long put designates to purchasing a put option, usually, in the expectation of a dip in the price of the underlying asset. A trader could buy a put for hypothetical reasons, gambling that the underlying asset will drop below the strike price which augments the value of the long-put option.
A long put could also be used to border a long position in the fundamental asset. If the underlying asset falls, the put option increases in value helping to compensate for the loss. The long put options trading strategy provides a person with the power to sell a stock at the stated price, A, as mentioned on the graph.
When the investor buys a put option, he bets that the stock will go below the strike price before getting expired. Employing a put rather than shorting the stock brings the risk down for the investor as they can only lose the cost of the put, in comparison to the limitless risk linked with shorting the stock.
If the stock price goes up, this options trade will expire without any worth, and the investor loses only the respective cost of the option. Similarly, an investor who shorted the stock will cease to face more losses as the stock continues to rise higher.
When buying puts, particularly short term, it is necessary for investors to stay cautious. If an investor invests heavily in several put agreements, their risk potential also shoots up. This is due to the fact that the options can decease worthless, whereby the investor would lose the entire amount invested.
When Long put is a sensible strategy?
There could be hundreds of reasons to buy put option contracts, for example, speculative objectives, referring that the investor thinks that a stock price is supposed to go down. A long put can also be used as a hedge against an already owned stock, to safeguard an asset if it’s to have a quick change in value, also known as a defensive put. Here if the stock that is already owned instantly dropped, having a put option would result in increased value, counterweighting the losses suffered from the stock.
Long Put vs Stock Shorting
For investors who look forward to taking an aggressive position in the stock, shorting the stock and buying put option contracts are the most preferred strategies.
Shorting a stock is a risky deal, as a stock’s price can go to any limit, which is why shorting a stock carries heavy risk. Buying a put is another bearish strategy as an investor can incur the loss as the cost of the put, so the risk has some boundaries. Both of these strategies have restricted profit potential, and gain value as the stock price reduces, but a stock can only fall until it attains zero. But buying a put option is a way to leverage the descending movement in stock while controlling the risk to the premium paid for the respective option contract.
The maximum loss an investor could encounter = Total Premium paid
The maximum profit for a long put strategy is boundless as the stock can crease to go down attaining more and more value, at least until it reaches zero.
The breakeven on a long put option is measured by reducing the premium from the strike price.
If a stock is currently trading $200 and an investor wants to buy a 180-strike price put for $4.0, then the breakeven would be $174.00.
If a stock named ABC is presently trading $200 and the investor thinks the stock would dip more, he may buy a 180-strike price put option for a $4. If the stock goes below to $170, they will make $10 on the 180 put, but because they paid $4 for the option, their total profit would be $6.
However, if the stock ceases to go up or never dips below to $180, the total loss would be $4.
Things to keep in mind
While following a long put strategy, an investor should be extremely bearish, with volatility going up, to make this contract advantageous.