Long Put Option Strategy

Buying a Put option is just the opposite of buying a Call option. You buy a Call option when you are bullish about a security. When a trader is bearish, he can buy a Put option contract. A Put Option gives the holder of the Put a right, but not the obligation, to sell a security at a pre-specified price.

A long Put is a Bearish strategy. To take advantage of a falling market an traders buy Put options. If the price of the stock falls, the put option increases. This is one of the most commonly used strategy when an investor is bearish.

A long put is also used by traders in order to hedge against unfavorable moves in a long stock position. This hedging strategy is known as married put.

  • When to Use:The underlying security closes above the strike price.
  • Risk: Limited to the amount of Premium paid. (Maximum loss if stock / index expires at or above the option strike price).
  • Reward: Unlimited
  • Breakeven: Stock Price – Premium
  • Profit when: The underlying security closes below the strike price.
  • Loss when: The underlying security closes above the strike price.

Let’s understand with an example:

Long Put Option Strategy
Current Nifty index 12100
Put OptionStrike Price (Rs.)12000
PayingPremium (Rs.)150
Break Even Point (Rs.) (Strike Price - Premium)11750

This strategy limits the profits to the amount of premium I paid (Rs.150). But the risk is unlimited in case of rise in NIFTY.

Conclusion

  • When you long a put option, you believe that the underlying security's price will fall.
  • A long put strategy offers unlimited profit and limited risk (premium).
  • Put longs are also used in order to protect the value of stocks you already own. These are called married puts.
Create your own option payoff chart
List of Top Nifty 50 Stocks