The ATM Long
Put is the basic bearish option strategy. Also used to protect long stock
option-info and options-graphs sites:
Outlook: very bearish. The stock must have a good percentage drop
by expiration for the call to break even. For a gain, the stock must drop
buy put(s), using the strike price nearest the current stock price.
when: stock falls enough by the expiration date to overcome the initial
Gain: no limit except stock falling to zero.
when: stock goes up, does not fall, or does not fall enough by the
expiration date to overcome the initial debit.
Loss : limited to the initial debit.
Calculation: Strike Price - Initial Debit.
compared to short stock: less capital required, increased leverage,
"built-in" stop loss, no dividend pay out.
compared to short stock: greater risk of 100% loss of the capital
invested, limited life, more stock movement needed to be profitable.
after entry, increasing implied volatility is positive.
after entry, the passage of time is negative.
Requirement : None. Initial debit must be paid in full.
Long Put, ITM; Long Put OTM.
Equivalent: Short Stock plus Long Call, ATM.
- ATM long
puts with at least a month to expiration are used by "swing traders"
trying to catch peaks in an downtrending stock, with a one or two week
holding period and a drop in the stock expected during that period.
- ATM long
puts can be used by day traders trying to catch overbought points during
a day's trading.
Because the ATM long put will have a Delta of about .5, the day trader
can possibly get about half the gain compared to being short the stock
from that point, on much less investment. Of course, buying two long
puts with a Delta of .5 can possibly give about the same dollar gain
as being short 100 shares of stock, with greatly increase leverage.
- ATM long
puts can be used to participate in possible "breakdowns",
using much less margin than shorting stock.
- ATM long
puts can be used by stock investors to protect their stock holdings
against dramatic declines. The breakeven point of the put creates a
"line in the sand" beyond which the total position will not
decline. The investor can exercise the puts at any time to sell stock
at the strike price. Remember, one contract protects 100 shares. I you
have 1000 shares, you would need 10 put contracts to provide protection
to all your shares.
- ATM long
puts can be used as initial protection for bullish stock investors.
The put creates a "stop loss" in case the bullish opinion
is wrong. If the stock is working out as expected when the put expires,
the stock investor can switch to a standard trailing stop on the stock.
Be aware that this combined position is also known as a "synthetic
long call", which means the graph is nearly identical to the graph
of an ATM long call. If you are expecting good stock movement in the
next month, you would want to use long calls for the dramatically lower
debit and extra leverage. If you want to be a stock owner for the long
term, then the synthetic version might be the one to use. Just remember
that owning a long call gives you the right to buy the stock at the
strike price, so even if you want to be a stock owner, you can still
start out with long calls and exercise the ones that work out.
- A trader
expecting the stock to be in a downtrend over time might want to use
ITM puts instead, and a longer time to expiration. A trader expecting
a dramatic bearish price move any day might use OTM puts expiring soon.
The ITM, ATM, OTM? page uses
long calls for examples, but the same ideas apply to using long puts
if you are bearish.
this is a very bearish position, the trader is obviously expecting the
stock to fall. If the stock does not fall, and the time to expiration
gets to just a couple weeks, it is usually wise to exit the trade. In
the position graph at the top of the page you can see the green time
line showing that the position has lost about $60 if the stock stays
at 50 for the first fifteen days, or a loss of about 30% on the $189
invested. If the trader continues to hold the position at that stock
price until expiration, the loss would jump to more than three times
that much, the entire $189 investment.
a long put is a component of many other option strategies, a long put
position can sometimes be adjusted or converted to those strategies.