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Long Put
The long put is a simple strategy in options trading that involves the purchase of a put option. The options trader employing the long put strategy believes that the price of the underlying stock will go down beyond a certain price before the expiration date.
| Long Put Construction |
| Buy 1 ATM Put |
Leverage
Compared to shorting the shares outright, the put buyer is able to gain leverage since the lower priced puts appreciate in value faster percentagewise for every point decline in the price of the underlying stock
Large Profit Potential
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 maximum profit is given below:
- Max Profit = Strike Price of Long Put - Premium Paid - Commissions Paid
- Max Profit Achieved When Price of Underlying = 0
Limited Risk
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
Breakeven Point(s)
The underlier price at which break-even is achieved for the long put can be calculated using the following formula.
- Breakeven Point = Strike Price of Long Put - Premium Paid
Out-of-the-money Puts
Going long on out-of-the-money puts maybe cheaper but the put options have higher risk of expiring worthless.
In-the-money Puts
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.