Options Guy's Tips

Put Options

What is a 'Long Put'.

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 Options Outlook: Bearish If you're bearish on a particular stock, you could buy put options in order to profit from the predicted decline. Buying one put is comparable to shorting

The Strategy

Long Put Options Outlook: Bearish If you're bearish on a particular stock, you could buy put options in order to profit from the predicted decline. Buying one put is comparable to shorting

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

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time Cash dividends issued by stocks have big impact on their option prices.

This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative A long put means buying a put option , typically in anticipation of a decline in the underlying asset. A trader could buy a put for speculative reasons, betting that the underlying asset will fall which will increase the value of the long put option.

If the underlying asset falls, the put option increases in value helping to offset the loss in the underlying.

A long put has a strike price , which is the price at which the put buyer has the right to sell the underlying asset. Exercising is not required. A short stock position theoretically has unlimited risk since the stock price has no capped upside.

A long put option is similar to a short stock position because the profit potentials are limited. The drawback to the put option is that the price of the underlying must fall before the expiration date of the option, otherwise, the amount paid for the option is lost. If the option is exercised, it will put the trader short in the underlying stock, and the trader will then need to buy the underlying stock to realize the profit from the trade.

A long put option could also be used to hedge against unfavorable moves in a long stock position.

Put Buying vs. Short Selling

Multiple leg options strategies involve additional risks , and may result in complex tax treatments.

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All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. Long A Call What are Options?

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