Trade options FREE For 60 Days when you Open a New OptionsHouse Account

The long put option strategy is a basic strategy in options trading where the investor buy put options with the belief that the price of the underlying security will go significantly below the striking price before the expiration date.

Long Put Construction |

Buy 1 ATM Put |

Compared to short selling the stock, it is more convenient to bet against a stock by purchasing put options as the investor does not have to borrow the stock to short. Additionally, the risk is capped to the premium paid for the put options, as opposed to unlimited risk when short selling the underlying stock outright.

However, put options have a limited lifespan. If the underlying stock price does not move below the strike price before the option expiration date, the put option will expire worthless.

Since stock price in theory can reach zero at expiration date, the maximum profit possible when using the long put strategy is only limited to the striking price of the purchased put less the price paid for the option.

The formula for calculating profit is given below:

- Maximum Profit = Unlimited
- Profit Achieved When Price of Underlying = 0
- Profit = Strike Price of Long Put - Premium Paid

Long Put Payoff Diagram

Trade options FREE For 60 Days when you Open a New OptionsHouse Account

Risk for implementing the long put strategy is limited to the price paid for the put option no matter how high the stock price is trading on expiration date.

The formula for calculating maximum loss is given below:

- Max Loss = Premium Paid + Commissions Paid
- Max Loss Occurs When Price of Underlying >= Strike Price of Long Put

The underlier price at which break-even is achieved for the long put position can be calculated using the following formula.

- Breakeven Point = Strike Price of Long Put - Premium Paid

Suppose the stock of XYZ company is trading at $40. A put option contract with a strike price of $40 expiring in a month's time is being priced at $2. You believe that XYZ stock will fall sharply in the coming weeks and so you paid $200 to purchase a single $40 XYZ put option covering 100 shares.

Say you were proven right and the price of XYZ stock crashes to $30 at option expiration date. With underlying stock price now at $30, your put option will now be in-the-money with an intrinsic value of $1000 and you can sell it for that much. Since you had paid $200 to purchase the put option, your net profit for the entire trade is therefore $800.

However, if you were wrong in your assessement and the stock price had instead rallied to $50, your put option will expire worthless and your total loss will be the $200 that you paid to purchase the option.

*Note: While we have covered the use of this strategy with reference to stock options, the long put is equally applicable using ETF options, index options as well as options on futures.*

For ease of understanding, the calculations depicted in the above examples did not take into account commission charges as they are relatively small amounts (typically around $10 to $20) and varies across option brokerages.

However, for active traders, commissions can eat up a sizable portion of their profits in the long run. If you trade options actively, it is wise to look for a low commissions broker. Traders who trade large number of contracts in each trade should check out OptionsHouse.com as they offer a low fee of only $0.15 per contract (+$4.95 per trade).

The following strategies are similar to the long put in that they are also bearish strategies that have unlimited profit potential and limited risk.

Going long on out-of-the-money puts maybe cheaper but the put options have higher risk of expiring worthless.

In-the-money puts are more expensive than out-of-the-money puts but the amount paid for the time value of the option is also lower.

Open an account at OptionsHouse.com and get 100 commission-free trades + free virtual trading tool!

Your new trading account is immediately funded with $5,000 of virtual money which you can use to test out your trading strategies using OptionHouse's virtual trading platform without risking hard-earned money.

Once you start trading for real, your first 100 trades will be commission-free! (Make sure you click thru the link below and quote the promo code '60FREE' during sign-up)

Click here to open a trading account at OptionsHouse.com now!OverviewBear Call SpreadBear Put SpreadCovered PutDiagonal Bear Put SpreadLong PutNaked Call (ITM)Naked Call (OTM)Put BackspreadProtective Call

Buying OptionsSelling OptionsOptions SpreadsOptions CombinationsBullish StrategiesBearish StrategiesNeutral StrategiesSynthetic PositionsOptions ArbitrageStrategy FinderStrategy Articles

Home | About Us | Terms of Use | Disclaimer | Privacy Policy | Sitemap

Copyright 2016. TheOptionsGuide.com - All Rights Reserved.