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The In-the-Money Long Put is a bearish option strategy that can make dollar gains much like shorting a stock, but with increased leverage.

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Strategy: Long Put, In-the-Money

Long Put In the Money Option Graph

The Outlook: Bearish. The stock must fall by as much as the time value bought to have a gain. (The time value is the amount over the intrinsic value. In the example put with the stock at 50, the 55 strike has an intrinsic value of $5.00, and the time value is .36).

The Trade: Buy put(s), using the next strike price above the current stock price.

Gains when: Stock falls enough by the expiration date to overcome the time value portion of the put price.

Maximum Gain: Limited only by the stock price falling to zero.

Loses when: Stock goes up, does not fall, or does not fall enough by the expiration date.

Maximum Loss : Limited to the initial debit.

Breakeven Calculation: Strike Price bought - Initial Debit.

Advantages compared to short stock: Less capital required, increased leverage, "built-in" stop loss.

Disadvantages compared to short stock: Greater risk of 100% loss of the capital invested, limited life, slightly 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, ATM; Long Put OTM.

Synthetic Equivalent: Short Stock plus Long Call at the strike used for the ITM Put.

Comments

  • Buying an In-the-Money put is the only long put in which you are actually buying intrinsic value. In the example stock, if the put expired the moment you bought it, it would still be worth $5.00, because the stock is at $50 and the strike price bought is 55. If you buy ATM or OTM long puts, you are basically buying the hope or expectation that the stock will go lower, but no intrinsic value.
  • ITM long puts can be used as short stock substitutes. They will track any downward move in the stock nearly dollar for dollar. The only difference is the amount of time value in the put.
  • Like all long puts, ITM long puts have a "built-in" stop loss. You can only lose as much as the put cost.
  • For the two reasons above, ITM long puts can be used instead of short stock, to buy possible "breakdowns", with much less risk than shorting stock.
  • A trader wanting to make less of a dollar investment might want to use ATM puts instead. A trader expecting a dramatic bearish price move any day might use OTM puts expiring soon. See the ITM, ATM, OTM? page for more information.

Exits

  • Since this is a bearish position, the trader is obviously expecting the stock to drop. If the stock does not drop, and the time to expiration gets to just a couple weeks, it is usually wise to exit the trade, taking less than the maximum possible loss.
  • If the trader is still bearish on the stock but feels he may have missed on the timing, the currently held long put can be "rolled" to one expiring in a later month. The currently held put will still have some value, which will help offset the cost of the new put.
  • If the stock moves lower as expected, the trader can take gains by selling the put at a higher price, rolling out to a later month, or exercising the put to sell stock at the strike price.

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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