Long Put option strategy is best used if you are extremely bearish in
the long term, or you expect a quick bearish move very soon.
option-info and options-graphs sites:
Outlook: Extremely bearish. At expiration, the stock must have fallen
to the OTM strike price, plus the initial debit, just for the option to
break even. It must have fallen more for the option to show a profit.
buy put(s), using the next strike price below the current stock price.
when: stock falls enough by the expiration date to overcome the lower
strike price and the initial debit.
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: much less capital required, vastly increased
leverage, "built-in" stop loss.
compared to short stock: much 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 ATM.
Equivalent: Short Stock plus Long Call at the strike used for the
an Out-of-the-Money put is the least expensive long put, and the least
likely to show a gain at expiration.
- OTM long
puts are used by speculators expecting a quick downward move in a stock.
A speculator who gets the timing right can double his investment in
a day or two.
- OTM long
puts can be used to trade against suspected overenthusiasm or "blow-off
tops" in a stock or index ETF, at much less risk than shorting
the stock or ETF.
If the speculator really is catching the top, the percentage gains can
- OTM long
puts can be used to speculate
on possible big downward moves at earnings time. If the speculator is
correct, large percentage gains are possible. If wrong, the dollar loss
is relatively low and limited.
- Like all
long options, OTM long puts have a "built-in" stop loss.
You can only lose as much as the put cost.
- A trader
wanting a better probability of the option ending up In-the-Money might
want to use ATM puts instead. A trader wanting the best probability
of a gain nearly dollar-for-dollar with a drop in a stock might want
to use ITM puts instead. See the ITM,
ATM, OTM? page for more information.
this is an extremely bearish position, the trader is obviously expecting
the stock to drop quite a bit. If the stock does not drop far enough,
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.
since this is a very low cost and speculative position in the first
place, it is not inconsistent with that strategy to just hold on until
expiration. Just like gambling, every once in a while there might be
a big winner if you stay in the game.
- If the
stock drops as expected, speculators usually take gains by selling the
put. However, they can also roll out to a later month, or exercise the
put to sell or sell short the 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.