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The ATM Long Put is the basic bearish option strategy. Also used to protect long stock positions.

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Strategy: Long Put, At-the-Money

Long Put At the Money Option Graph

The 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 even more.

The Trade: buy put(s), using the strike price nearest the current stock price.

Gains when: stock falls enough by the expiration date to overcome the initial debit.

Maximum Gain: no limit except stock falling to zero.

Loses when: stock goes up, does not fall, or does not fall enough by the expiration date to overcome the initial debit.

Maximum Loss : limited to the initial debit.

Breakeven Calculation: Strike Price - Initial Debit.

Advantages compared to short stock: less capital required, increased leverage, "built-in" stop loss, no dividend pay out.

Disadvantages compared to short stock: greater risk of 100% loss of the capital invested, limited life, more stock movement needed to be profitable.

Volatility: after entry, increasing implied volatility is positive.

Time: after entry, the passage of time is negative.

Margin Requirement : None. Initial debit must be paid in full.

Variations: Long Put, ITM; Long Put OTM.

Synthetic Equivalent: Short Stock plus Long Call, ATM.

Comments

  • 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.

Exits

  • Since 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.

Adjustments

  • Since a long put is a component of many other option strategies, a long put position can sometimes be adjusted or converted to those strategies.

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