Long Put Option

B/S	Strike	Type	Price
Buy 1	$45	Put	$1.29
Net Debit			$129

A long put is the purchase of a put option.

The Max Loss is limited to the net premium paid for the option.

The Max Gain is uncapped as the market falls but limited to the strike price minus the stock price as the stock cannot trade lower than zero.

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.

Long Put Option Greeks

Delta

Gamma

Vega

Theta

57 Comments

brian September 12th, 2013 at 10:17am

I'm really confused about this claim of "unlimited profit." Lets say a stock is trading at 50 and I buy a long put with a strike of 40. Lets say the option costs me $1. If the stock goes to zero (which is as far as it can go), my profit is $39. As a percent, this is 39/1 or 3,900%. It still isn't infinite. No one sells you an option for free. Where is this idea of infinite profit potential coming from?

Peter May 7th, 2013 at 11:45pm

Hi Larry,

If you think that volatility will play a lager role in the SPY than the price then I would say you would be best buying the near term at-the-money put option.

Near term options are more sensitive to changes to volatility.

However, you should also consider how far you think they market has to move in your favour. Vega (or price change due to volatility) is highest for ATM options so as the market does move more in your direction it may move past the strike. So, another suggestion is to buy a put option that is slightly out-of-the-money so that as the market approaches your strike level you get maximum change in premium due to volatility changes.

Larry May 7th, 2013 at 12:56pm

Hi, I am interested in buying two put options for SPY, since I think it will go down with strong volatility, with one option with 6 months and the other 1 year expiry. But how do i choose different strike prices because with the same expiry date, one strike price higher 5 dollars but the option price is only 3 dollars more expensive? I know it has something to do with time value. How do I choose the best strike price?

Peter August 2nd, 2012 at 6:02am

Hi Kevin,

Sorry for the delay in responding! I saw your post and thought it would take more thought to respond so I put in the "too hard basket" ;-)

However, upon re-reading it I'm not sure I follow the posters' strategy.

If you buy 3 calls for $1.12 and 3 puts for $1.56 then the max loss is $804 (3 * 1.12 * 100) + (3 * 1.56 * 100).

Also, XYZ seems to be a fictitious stock so I don't see how I can confirm the price changes and option prices ;-)

Kevin July 10th, 2012 at 12:53pm

Peter,

I copied this from another poster in your blog here. My question is this, as this is the style of spreads I am looking into making myself, these numbers don't add up to me. Can you explain in laymans terms what this guy did and how it works to profit either at or just before expiry???

I just got finished using the P/L Calculator on optionshouse paper trading and tried a couple different combinations, one in particular that i would appreciate some insight on. XYZ is trading at $40, and purchasing 3-$39 calls @$1.12 and a 3-$41 [email protected]. From 40 to 41.36 its a loss(max $36), looking at the monthly chart the stock has moved in a $2.50-$4 range for the entire ytd. $804 total investment; $2-$4 down returns $300-850; $2 up returns $100-$650. The problem here is it seems to good to be true. Am I misinterpreting something OR does that sound about right?

Peter July 6th, 2012 at 10:30pm

Hi Konstantin,

Thanks for the feedback on the site! I am trying to make it a little cleaner with the new layout.

Using options really depends on your objectives. If you hold stock and wish to gain some extra income in return for giving up some upside potential then covered calls might suit. If you want to buy a stock at a lower price within 2 months and get paid for that then you might like shorting puts.

If, like you asked, want to just make huge returns punting on market direction then you are best placed buying and selling options (just trading them) as if they were stocks. But you will need to have a view of the market i.e. going up or down to do this sucessfully. Using options this way provides a lot of leverage or bang for your buck with your money.

Konstantin July 4th, 2012 at 7:11pm

Hey Pete,
First, love your new style of website great job :)

Ok, I'm use to trade Future Contract, and is very easy to sell and Buy. But now, i'm looking to go to my TFSA and RRSP account to trade and get tax free :) money ( Love Canada System:)) but...you guys, have more complicated stuff in Options:p

I trade my first Put option past week, you will notice I did many mistake but how ever...I make some money :) and this why I have question for you.
so my trade was :
-42 1contract-PUT-ATM pay price of 2$ total 200$.
-It drop to 40, was looking to get out. at this price. for quick cash :)
-But I wasn't able to buy...or I din't know how at 40$ those 100shares to get 200$ profit on than.
-So I sold my 1c option for BIT price 3$
-I make 100$..-9.95$ contract...was happy to make 40% but still...

So my question it's....
-how do I use options for maximum profit...do I have to sell/buy as a shares automatically? or As an options?
-to short a stock...with minimum risk ( to my cost of options...in this case 200$)... what do I have to use? Long put option? and to go long,Long call option?
-This what I was expect to do in future in options and can I? and if yes how?
1st-Buy Put 10option at 10$ for 1$/share.
2nd-Sell 6 option/600share at 8$ to get easy income
3rd-Use stop order at 9$ for 2option/200shares to lock in profit.
4th- sell 2options/200shares , at next target price and Celebrate all day :)

PS: I'm an analyses trader,I'm doing very very well on see the market direction on short/long terme...and this why I want to use simple strategy to ATM Put or Call, but with minimum risk and low capital (this why options)

So hope I was clear enough :)and tnx a lots for your help

Konstantin

Peter March 26th, 2012 at 6:52pm

Hi Kuruvilla,

No, I think Vishal is saying that he was originally the buyer of the put and then he wishes to close the put by selling back to the market. In that case the counter party will be another option buyer.

KURUVILLA March 14th, 2012 at 2:50am

Am studying about options.Hello Peter,let me clarify a doubt about a question put up by Vishal on 1st November,2009.Is not the answer would be like "the seller or writer of the option ".Please clarify.

Peter January 2nd, 2012 at 4:41pm

Hi Shawn, that's seems fine to me - that is the power of leverage and the main reason retail traders use options. But, you can also lose those amounts (or your entire premium) if the market goes against you.

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