The long put option trading strategy gives an individual the right to sell an underlying stock at a specified price. As listed on the graph. When the investor buys a put option. He is betting that the stock will fall below the strike price before the expiration date. Using a put instead of shortening the stock reduces the risk for the investor as they can only lose the cost of the put. Underscoring the unlimited risks associated with shortening the stock.
Long put option
If the stock rises, the long-held option will become worthless. And the investor will only lose the cost of the option. Similarly, an investor who has depreciated the stock will lose more and more as the stock continues to climb. Investors need to be careful when buying puts, especially short term ones. If an investor buys multiple put contracts, their risk also increases. This is because the options may become worthless, causing the investor to lose the entire investment.
When buy put option
There are many reasons to buy a put option contract, these may be for speculative purposes. Which means that the investor believes the stock price is about to fall. A long put can also be used as a hedge against previously owned stock. To protect an asset if it is a sudden change in value, also known as a protective put.
Here, if the stock has already dropped suddenly. The put option’s proprietary value will increase, to compensate for the loss from the stock.
Buying a put vs stocking shorting
For investors who want to take a slowdown in the stock. Shortening the stock and buying a put option contract is the most popular strategy.
Reducing a stock is a risky endeavor, as the price of a stock can rise to infinity. Which is why shortening the stock carries unlimited risk. Put buying is an alternative bearish strategy because an investor can only lose the price of a put, so this risk is limited. Both of these strategies have limited profit potential. And gain value as the stock falls, but a stock can only fall until it reaches zero. But buying put options is one way to capitalize the downward movement in the stock. While the risk is to ensure that the option is limited to the premium paid for the contract.
Maximum loss = Net premium paid
The maximum profit for a long put strategy is unlimited because the stock can continue to receive at least more value until it reaches zero.
The discount on the long put option is calculated by subtracting the premium from the strike price.