Long Put

What is a Long Put?

A long put gives you the right to sell underlying shares at the strike price, at anytime before the put expires, no matter how low the stock price drops. You are in control here - i.e., you decide if and when to exercise the put contract. The price you pay for the put is all you can lose.

Why use Long Puts

Investors often use long puts to take a bearish position on a particular stock when they might be uncomfortable with the unlimited risk of a short stock position and don't want to tie up their investment capital meeting the margin requirements. Investors are likely to use long puts to help take advantage of the leverage potential it offers at considerably less risk and with less upfront cash requirement. If their bearish opinion proves correct, it's possible to see high percentage profits using a long put strategy.

Market Opinion of Long Puts

You are bearish on the underlying stock. You're taking a decidedly bearish position. To make the profits you're looking for, the underlying stock needs to go down, and within the time frame you expect (i.e., before the put expires).

Maximum profit potential: substantial

You can continue to profit as long as the price of the underlying stock decreases. The only limit is that the stock can't drop below zero!

Loss potential: limited

Your maximum loss is limited to the premium paid for the put, no matter how much the underlying stock may go up in price.

Break-even point (B.E.P.) at expiration:

Underlying stock price = strike price - premium paid
If the stock price increases large percentage losses are possible, up to and including your entire investment - i.e., the premium for the long put.

Possible Scenarios of Using a Long Put

Positive Scenario of a Long Put

The underlying stock price drops considerably. In this case you could sell the put and realize large percentage profits.

Negative Scenario of a Long Put

The underlying stock increases drastically and rapidly in price.  If this happens, your put may lose all its market value before you can sell it.

How does Volatility impact Long Puts?

An increase in implied volatility is generally viewed as a positive factor for long puts; a decrease in volatility is a negative factor.

Time Decay and Long Puts

Time decay is a negative factor for any long put option contract.

Example Long Put Trade:

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Please note: All or part of your investments using bearish strategies has greater risk of loss in rising markets.