Long Put is a bearish option strategy that can make dollar gains much
like shorting a stock, but with increased leverage.
option-info and options-graphs sites:
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).
Buy put(s), using the next strike price above the current stock price.
when: Stock falls enough by the expiration date to overcome the time
value portion of the put price.
Gain: Limited only by the stock price falling to zero.
when: Stock goes up, does not fall, or does not fall enough by the
Loss : Limited to the initial debit.
Calculation: Strike Price bought - Initial Debit.
compared to short stock: Less capital required, increased leverage,
"built-in" stop loss.
compared to short stock: Greater risk of 100% loss of the capital
invested, limited life, slightly 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, ATM; Long Put OTM.
Equivalent: Short Stock plus Long Call at the strike used for the
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.
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
- 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.
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.
a long put is a component of many other option strategies, a long put
position can sometimes be adjusted or converted to those strategies.