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The Different Option Strategies
Long Put
An aggressively bearish trade. Buying puts has plenty of risks though because timing often has to be almost perfect. The strategy is best used when you expect a sharp and quick sell off.
Long Put
Risk: Limited
Reward: Limited to the initial cost of the Put option.
The Trade: Buy a Put. The more bearish your view the further out of the money you should go.

ABC Stock trading at £5.00

Buy 1 Sep £4.50 call (see pay-off diagram below)

Options - Long Put

When to use: Very bearish preferably in the short term No other position gives you as much leveraged advantage in a falling stock/index (with limited downside risk).
Volatility expectation: Very bullish
Profit: Not unlimited because assets (stocks) can't fall below zero. But if you buy at the perfect time when volatility is low and the market crashes, profits of 1,000s% are obtainable.
Loss: Restricted to the premium paid
Breakeven: Reached when the underlying falls below the strike price by the same amount as the premium paid to establish the position.
Time decay: This position is a wasting asset. As time passes, value of position erodes toward expiration value. If volatility increases, erosion slows, if volatility decreases, erosion speeds up.

Trading ideas and tactics:

  • Consider mixing it up, maybe look to buy puts with different strikes

  • Watch that volatility. If the market has already tumbled then chances are that by going long puts you've missed the boat as you'll be buying very expensive options

  • If you're bearish try and buy them on rallies in a downtrend

  • Buying puts is normally a bad way to hedge stock risk because they are a wasting asset. For example if you are long ABC stock and buy a put and the share doesn't move lower you will lose money, and that's not hedging

  • A better hedge would be to use CFDs to sell short the shares you own
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