The Long Put Option Strategy

 

A long put option strategy gives you the right to sell an underlying asset at a predetermined strike price within the timeframe of the put.

 

Market Opinion

 

Bearish.

 

 

P/L

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

When To Use A Long Put Option Strategy

 

A Long Put option strategy is utilized when the trader or investor believes the underlying stock price is going to decline, and they therefore want to purchase puts to make money on that potential move. Buying the put gives them the right to sell their stock at a certain price within a certain period of time.

 

Example

 

General Electric is trading at $20. The 19 put for GE is trading at $0.80. So for $80 you could buy one put (.80 x 100), giving you control over 100 shares of GE. You now bought the right to sell 100 shares at $19 per share. If GE stays at $20 or above, your maximum loss would be $80. If GE fell to $15 at expiration, your put would be worth $4  (19 - 15= 4). So your put contract would be worth $400, minus the $80 you paid for it, equaling a total profit of $320.

 

Benefit

 

A Long Put option strategy offers a way to leverage the contract for large percentage profits without the risk that a short sale would have. There is a predefined limited downside risk with a lower amount of money committed than would have been needed for a short sale of stock as well as no risk of a margin call that a short sale would have. There is substantial room for profit and a limited potential and predefined amount of loss.

 

Risk vs. Reward

 

There is a substantial upside for profit, and a limited downside for loss. The risk is that loss can be the entire amount of the premium paid.

 

Net Upside

 

Strike price minus stock price at expiration minus premium paid.

Net Downside

 

Strike price minus stock price minus premium paid

 

Break Even Point

 

The break even point at expiration of a long call is the strike price minus the premium paid.

 

Effect Of Volatility

 

Volatility effects the time value of a long call, having a positive effect if it increases, and a negative effect if it decreases.

 

Effect Of Time Decay

 

With the passage of time, there is a negative effect, or time decay, on the premium.

 

Alternatives Before Expiration

 

The Long Put can be sold or exercised in order to capture profit or to stem a loss before expiration.

 

Alternatives After Expiration

The option owner can either sell the put if it is in-the-money, or exercise it and buy the underlying shares at the agreed upon strike price.