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Long put
Long put is a one-legged, risky, bearish option strategy with limited risk. Selling a put option is an alternative to selling stocks with leverage. The chart below shows a long put option strategy with a strike price of 100 and a price of 5 and a profit/loss diagram.
Greeks and this strategy
| Greek | How it behaves |
|---|---|
| Delta | Negative. The position gains value when the underlying falls; delta approaches -1 as the put moves deeper in the money. |
| Theta | Negative. Time decay erodes the long put premium when the stock stays flat or rises. |
| Gamma | Positive. Delta becomes more negative on declines, increasing downside sensitivity near the strike. |
| Vega | Positive. Rising implied volatility increases put value; volatility crush after events hurts the position. |
Overview of long put
Long put options give the seller the right, but not the obligation, to sell stocks of the underlying asset at the strike price within or before expiration. Since options are leveraged investments, each contract is equivalent to owning 100 stocks (relevant for the US market). The advantage of using a long put option is that it requires less capital compared to the costs of owning 100 stocks, and the risk of loss is limited to the cost of the option contract.
Market prospects of long put
A long put is sold when the seller believes that the price of the underlying asset will fall by at least the cost of the option at expiration. Further out-of-the-money (OTM) strike prices will be cheaper, but with a lower probability of success. The further the strike price is out of the money, the more bearish the trader is, selling a put option. But the potential profit in this case is much higher.
How to open a long put position
The position of a long put is opened when the seller sells a put option contract. Puts are listed in the option desk and provide the corresponding information for each strike price and available expiration time, including the bid and ask prices. The cost of entering into a trade is called the premium. Market participants consider several factors to assess the value of an option premium, including the strike price relative to the stock price, time to expiration, and volatility.
Profit/loss diagram for a long put
The profit/loss diagram for a long put is simple. The maximum risk is limited to the cost of the option. The potential profit is unlimited. To break even at expiration, the stock price must fall below the strike price by the cost of the long put option. For example, if a long put option with a strike price of $100 is sold for $5.00, the maximum loss is determined to be $500, and the potential profit is unlimited if the stock continues to fall. However, the underlying stock must be below $95 at expiration to realize a profit.
How to enter a long put position
To enter a long put position, a sell order (BTO) is sent to the broker. The order is either executed at the bid price (market order) or at a specific price that the investor is willing to pay (limit order). Selling a put option results in a deduction of funds from the trading account.
How to exit a long put position
There are several ways to exit a long put position. At any time before expiration, a buy order (STC) can be entered, and the contract will be bought at the market price or at a limit price. The premium received from the purchase will be credited to the account. If the contract is bought for a higher premium than the initial sale, a profit is realized. If the contract is bought for a lower premium than the initial sale, a loss is realized. If the long put option is in the money (ITM) at expiration, the holder of the contract can exercise the option and sell 100 stocks at the strike price. If the long put option is out of the money (OTM) at expiration, the contract expires worthless, and a full loss is realized.
The impact of time decay on a long put
The remaining time to expiration and implied volatility constitute the extrinsic value of the option and affect the price of the premium. Under the same conditions, option contracts with a longer time to expiration will have higher prices because there is more time for the option to be in the money (ITM, in the money).