Long Put
Components
A long put is simply the purchase of one put option.
Risk / Reward
Maximum Loss: Limited to the net premium paid for the option.
Maximum Gain: Unlimited as the market sells off.
Characteristics
When to use: When you are bearish on market direction and bullish on market volatility.
Like the long call a long put is a nice simple way to take a position on market direction without risking everything. Except with a put option you want the market to decrease in value.
Buying put options is a fantastic way to profit from a down turning market without shorting stock. Even though both methods will make money if the market sells off, buying put options can do this with limited risk.
Comments (18)
ken
July 14th, 2010 at 2:31pm
I have been trying to get this answer If you buy a put and the stock is hard to borrow will the broker prevent you from exercising? or will they automatically cover the position at the close? or do they let you exercise and commit a naked short?
Peter
July 7th, 2010 at 7:44am
Hi Raj, if you take a look at the payoff graph above for a put option it will show you how the price of the option changes when the stock price changes. A put option will gain value when the stock price declines, which is the opposite of a call option. A call option rises in value as the stock price inceases.
Raj
July 6th, 2010 at 11:39pm
Hi, I am beginner in the options trading. Need help in understanding the call and put. I assume the call and put price will go higher with price of stock coming a strike price. Taking a example of stock XXXX at strike price 440@11.30 put but trading at 500... As the stock price of XXXX come downd... put go higher... is this correct?.. please explain with an example
Peter
June 28th, 2010 at 6:53pm
Hi Hvete, it's not a stupid question at all...it's good that you asked.
The key to understanding options is that they carry the "right" to buy/sell an asset - not an obligation. If you have bought an option and do not wish to "exercise" it, then you simply allow the option to expire and all you lose is the premium paid.
This is why there is no mechanism to ensure that you hold the stock when you buy a put option. However, if you have bought a put option with a strike price of $25 and the stock is trading at $20 at expiration then why wouldn't you go and buy the stock and exercise your option for an immediate gain of $5 per contract? (some brokers will automatically borrow the stock for you if you exercise an option with collateral).
To answer your last question...the buyer of the option have the "right" to exercise but the sellers of the option are "obliged" to exercise. I.e. the sellers don't have the choice...if you decide to exercise and sell the stock, the seller of the option has to buy the stock from you. That is why the buyer pays the premium to the seller.
Hvete
June 27th, 2010 at 9:13pm
Additional stupid question. Suppose I have a put option that gives me the right to sell IBM stock at $40 a share (assuming we can get around the problem that I don't own any IBM stock). How can I have a right to sell if no one wants to buy, and surely no one will want to buy if IBM is trading at $35.
Hvete
June 27th, 2010 at 9:08pm
So here's the really stupid question. One thing I keep trying to get my head around is this. A put option gives me the right to sell a stock at a certain price. How can I have the right to sell a stock if I don't own it? So if I do own it, and every time you buy a put option, there's some mechanism to affirm that I own the underlying stock? If I own the stock, I can't see any terribly good reason to buy a put option. If I don't own the underlying stock, how can I sell what I don't own? So I read that I borrow the stock. Borrow the stock? Like I borrow your house and sell it? I can't borrow your house and sell it and then buy it back... at least not without your permission. So why does anyone grant permission to lend their stock so someone can play games with it? What's in it for the real owner of the stock?
Peter
June 21st, 2010 at 7:44pm
If the option specifications are set for physical delivery, then I guess it depends on your situation with your broker. They may borrow the stock on your behalf to on-sell to your counterparty who is short the put option.
If the option is cash settled (i.e. most index options) then no asset is transferred.
Also...if you are long an in-the-money put and you know that you don't have enough funds to cover the stock purchase, then you would just sell the option prior to the expiration date and realize the gain that way.
maria
June 14th, 2010 at 5:06pm
What will I receive if I exercise a long put and I have no assets?
Peter
November 7th, 2009 at 5:17am
Hi Vishal, other speculators who are still bearish on the stock, market makers, investors hedging their long stock or option traders who are buying puts as part of an option combination are examples of who would be buying the option from you.
vishal
November 1st, 2009 at 11:19pm
let us say i have put option and during bearish market i want to use my put option to earn profit, at that time who will purchase my costlier put option (even if i have right to sell) as the price movement is downwards. plz help
Peter
August 20th, 2009 at 9:11pm
It would only be 40/0 if you paid 0 for the option.
Stan
August 18th, 2009 at 8:06pm
You don't need negative stock prices for unlimited profit potential. When expressed as a percentage, if the underlying stock goes to zero, your gain is infinite. If the current value of the stock is 50, you buy a put with a 40 strike and it goes to zero, your gain on the option is 40/0, or infinite percent.
sarbjit
July 26th, 2009 at 3:37am
Dami,
yes, we can hedge a scrip to decresing in value through long put option.
Dylan
January 4th, 2009 at 12:45pm
The profit potential of a long put option is only unlimited if negative stock prices exist.
Admin
January 2nd, 2009 at 6:42am
Hi Yonis, not sure what you mean. Long refers to a purchase and Short a sale...not long and short term. Hope that helps.
yonis
December 24th, 2008 at 2:59am
how i can differentiate put and call option under long and short term?
Admin
September 25th, 2008 at 6:06pm
Yep, that's a strategy called a Protective Put. Please see the link under Bullish category.
Dami
September 24th, 2008 at 10:37pm
Don't we use long puts to protect a stock we currently own from decreasing in value.
Add a Comment