What is a Long Put?

A long put is the purchase of a put option and operates similarly to a long call, but with a bearish attitude. Like a long call, this trade has an almost unlimited upside, while the risk is limited to the amount paid for the option.

put-option

The best time to buy a put is when you are bearish on a stock. A long put becomes profitable when the underlying stock falls enough that the option price is higher than the price paid to enter the position. The more the stock falls, the more profitable the put should become.

Just as with the long call, the amount of premium will be higher for an option with an expiration date farther out in the future and the amount of premium also increases as the strike price is closer to the stock price.

The long put holder can hang onto the position until expiration and cash in by exercising the put to sell it at his strike price, then buying the stock at market price, but the more common way to profit is to sell the put before expiration.

At expiration, if the underlying stock is above the put’s strike price, then the option will expire worthless and just disappear. The investor will lose the entire amount paid up front, but no more, even if the stock shoots to the moon.

The break-even point for a long put at expiration is the strike price minus the amount of premium originally paid for the option. This is also sometimes known as the target price. The lower the stock price falls below the target price, the more the put is worth, thus the nearly unlimited potential returns. If you bought a put on a stock that goes bankrupt, then you have the right to sell it for the strike price then buy for just pennies to close the trade.

Even if the stock finishes at expiration above the target price, you can still get some of your capital back, as long as the stock is below the strike price.

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