Long Put Option Strategy
long put option strategy gives you the right to sell an underlying asset at a
predetermined strike price within the timeframe of the put.
To Use A Long Put Option Strategy
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.
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.
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.
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.
Strike price minus
stock price at expiration minus premium paid.
price minus stock price minus premium paid
break even point at expiration of a long call is the strike price minus the
effects the time value of a long call, having a positive effect if it
increases, and a negative effect if it decreases.
Of Time Decay
the passage of time, there is a negative effect, or time decay, on the premium.
Long Put can be sold or exercised in order to capture profit or to stem a loss
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.