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You Are Here: Home > Stockmarket & Trading > Options > Option Strategies > Long Put
The Different Option Strategies
Long Put
Summary:
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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