Long Put Option
| B/S | Strike | Type | Price |
|---|---|---|---|
| Buy 1 | $45 | Put | $1.29 |
| Net Debit | $129 | ||
A long put is the purchase of a put option.
The Max Loss is limited to the net premium paid for the option.
The Max Gain is uncapped as the market falls but limited to the strike price minus the stock price as the stock cannot trade lower than zero.
Characteristics
When to use: When you are bearish on market direction and bullish on market volatility.
Like the long call a long put is a nice simple way to take a position on market direction without risking everything. Except with a put option you want the market to decrease in value.
Buying put options is a fantastic way to profit from a down turning market without shorting stock. Even though both methods will make money if the market sells off, buying put options can do this with limited risk.
Long Put Option Greeks
Delta
Gamma
Vega
Theta
57 Comments
Peter October 9th, 2014 at 5:08pm
Hi Ron,
No, but you will have to sell the stock at the strike price. If you don't already own the shares then your broker will borrow the shares on your behalf and then sell those shares to the seller of the put option.
You will then have a "short" position of shares in your account (traded at the strike price) that you will have to buy back at a lower price in order to make a profit.
Ron easley October 9th, 2014 at 9:26am
I have a long put option at 75 and at the strike date completes and the stock price is 72. Will I have to buy the stock at 75? Don't know much about options.
Peter August 4th, 2014 at 12:26am
Hi Jamaal,
Option prices (premiums) will fluctuate in response to changes in factors such as underlying price, volatility, time decay and interest rates. The price of the option can rise after you have purchased it providing you with an opportunity to profit by selling it back to the market at the higher price - instead of exercising it or waiting for the option to expire before exercising.
Does this answer your question?
jamaal August 3rd, 2014 at 10:13am
Hi,
Whats happens if the long put position rises more than the premium paid but then it starts declines in prices before expiry? In other words can a worthless long put contract turn to profit?
-Jamaal
[email protected]
Peter March 26th, 2014 at 3:33am
Hi Russ, this will be because the implied volatility of the option has decreased by a magnitude greater than the effect of the delta (underlying price change).
Volatility is a major component that makes up the price of the option; higher volatility means higher option prices, lower volatility means lower option prices. Perhaps the volatility was relatively high when you bought the option only for it to decrease post purchase?
Steve_A March 14th, 2014 at 11:27am
Thanks Peter, clear now.
Russ March 14th, 2014 at 9:23am
I have a question, i brought a put for a strike price of $40 and exp date of 3/22
XYZ is currently down to $34 a share. why am i showing a negative amount next to my put purchase? i brought the put when the stock price was at $42
[email protected]
Peter March 11th, 2014 at 4:27am
Hi Steve_A,
Please have a look at the page on Payoff Diagrams.
Let me know if anything is not clear and I'll update the page with your feedback.
Steve_A March 8th, 2014 at 3:31pm
Hello Peter. You have a knack for explaining complicated terms and scenarios in a digestible fashion; thank you. Can you point me to a resource that will help me to understand the P/L graphs? I'm just looking for a general understanding of the graph.
Peter September 13th, 2013 at 8:40am
Hi Brian, yep, I see what you mean for long puts - your profits are capped at the strike - stock price. For a long call, however, your profits are limited only to the price that the stock can rise to. "Unlimited" profit for long profile graphs like this has just been the convention used since I've been learning about options. I would say that it is used to provide some context on a likely move for a stock i.e there is no immediate "cap" on your profit - it will ride as long the stock trades in your direction. Sure, if you're long a put at $1 like you say and it free falls to zero, that would be your limit though.
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