Investor's wiki
en English
Navigation
Home Glossary
InvestingStocksBondsCryptoPersonal FinanceFundamental AnalysisTechnical AnalysisTradingBankingTaxes
Disclaimer Terms of Use Privacy Policy Cookie Policy
Navigation
Home Glossary
InvestingStocksBondsCryptoPersonal FinanceFundamental AnalysisTechnical AnalysisTradingBankingTaxes
Disclaimer Terms of Use Privacy Policy Cookie Policy

Long Put

Long Put
TradingOptions and Derivatives TradingOptions and Derivatives

What Is a Long Put?

A long put alludes to buying a put option, regularly in anticipation of a decline in the underlying asset. The term "long" Doesn't here have anything to do with the time allotment before expiration yet rather alludes to the trader's action of having bought the option with the hope of selling it at a higher price at a later point in time.

A trader could buy a put for speculative reasons, betting that the underlying asset will fall which increases the value of the long put option. A long put could likewise be utilized to hedge a long position in the underlying asset. In the event that the underlying asset falls, the put option increases in value assisting with offsetting the loss in the underlying.

Figuring out a Long Put

A long put has a strike price, which is the price at which the put buyer has the option to sell the underlying asset. Expect the underlying asset is a stock and the option's strike price is $50. That means the put option qualifies that trader for sell the stock at $50, even if the stock drops to $20, for instance. Then again, if the stock transcends $50, the option is worthless in light of the fact that it isn't helpful to sell at $50 when the stock is trading at $60 and can be sold there (without the utilization of an option).

In the event that a trader wishes to use their right to sell the underlying at the strike price, they will exercise the option. Practicing isn't required. All things considered, the trader can basically exit the option whenever prior to expiration by selling it.

A long put option might be exercised before the expiration on the off chance that it's a American option though European options must be exercised at the expiration date. In the event that the option is exercised early or terminates in the money, the option holder would be short the underlying asset.

Long Put Strategy versus Shorting Stock

A long put might be a favorable strategy for bearish investors, instead of shorting shares. A short stock position hypothetically has unlimited risk since the stock price has no capped upside. A short stock position likewise has limited profit potential, since a stock can't fall below $0 per share. A long put option is like a short stock position in light of the fact that the profit possibilities are limited. A put option will just increase in value up to the underlying stock arriving at nothing. The benefit of the put option is that risk is limited to the premium paid for the option.

The drawback to the put option is that the price of the underlying must fall before the expiration date of the option, in any case, the amount paid for the option is lost.

To profit from a short stock trade a trader sells a stock at a certain price wanting to have the option to buy it back at a lower price. Put options are comparable in that in the event that the underlying stock falls, the put option will increase in value and can be sold for a profit. In the event that the option is exercised, it will put the trader short in the underlying stock, and the trader will then have to buy the underlying stock to understand the profit from the trade.

Long Put Options to Hedge

A long put option could likewise be utilized to hedge against unfavorable moves in a long stock position. This hedging strategy is known as a protective put or married put.

For instance, accept an investor is long 100 shares of Bank of America Corporation (BAC) at $25 per share. The investor is long-term bullish on the stock, yet fears that the stock might fall over the course of the next month. Subsequently, the investor purchases one put option with a strike price of $20 for $0.10 (duplicated by 100 shares since each put option addresses 100 shares), which terminates in one month.

The investor's hedge covers the loss to $500, or 100 shares x ($25 - $20), less the premium ($10 total) paid for the put option. All in all, even on the off chance that Bank of America falls to $0 throughout the next month, the most this trader can lose is $510, in light of the fact that all losses in the stock below $20 are covered by the long put option.

Instance of Using a Long Put

How about we accept Apple Inc. (AAPL) is trading at $170 per share and you think it will diminish in value by around 10% ahead of another product send off. You choose to go long 10 put options with a strike price of $155 and pay $0.45. Your total long put options position outlay cost is $450 + fees and commissions (1,000 shares x $0.45 = $450).

Assuming the share price of Apple falls to $154 before expiry, your put options are presently worth $1.00 since you could exercise them and be short 1,000 shares of the stock at $155 and promptly buy it back to cover at $154.

Your total long put options position is currently worth $1,000 (less any fees and commissions), or (1,000 shares x $1.00 = $1,000). Your profit on the position is 122% = ($1,000-450)/450. Going long put options permitted you to understand a lot greater gain than the 9.4% fall in the underlying stock price.

On the other hand, assuming Apple shares rose to $200, the 10 option contracts would lapse worthless, bringing about you losing your initial outlay cost of $450.

Features

  • Investors might go long put options to guess on price drops or to hedge a portfolio against downside losses.
  • A long put is a position when someone buys a put option. It is all by itself, in any case, a bearish position in the market.
  • Investors go long put options on the off chance that they think a security's price will fall.
  • Downside risk is consequently limited utilizing a long put options strategy.