What is a Long Put?
A long put is an options strategy that involves buying a put option for an underlying asset at a specific strike price for a specific amount of time or until the expiration date. The trader takes the role of the buyer and pays a premium for the put. The strategy aims to profit from the decrease in the asset’s price.
Long puts are versatile and can be used for different purposes, like:
- Speculation for expected bearish price movement
- Leveraged exposure
- Hedging
- As part of a more expansive options trading strategy
How Does a Long Put Option Work?
Long puts are a bearish strategy. Traders buy long puts when they anticipate the underlying security will decrease below a specific price by the expiration date. If the price does not drop as expected, the option will expire worthless, and the trader will lose the premium paid for the contract. This premium represents the maximum potential loss on the trade.
How Do You Trade a Long Put?
Here’s the strategy breakdown for the long put:
| Trade Leg | Action | Asset | Moneyness |
|---|---|---|---|
| 1 | Buy | Put Option | Depending on Goal and Risk Tolerance (Long puts can be bought in-the-money, at-the-money, and out-of-the-money) |
Sample Long Put Trade
Buy one (1) $100-strike put for XYZ Company for $3.00 per share or $300 total per put, with 30 days to expiration (DTE)
Trade Detail Breakdown
- Underlying Asset: XYZ
- Strike Price: $100
- Premium Paid: $3.00 per share or $300 total.
- DTE: 30 days
Profit/Loss Profile
Long puts have defined losses, limited to the premium paid to set up the trade plus commissions. Meanwhile, the maximum profit is limited to the breakeven point amount, which is achieved if the asset’s price falls to zero.
- Maximum Profit: Limited to when price falls to zero
- Breakeven Point: Strike Price - Premium Paid
- Maximum Loss: Premium Paid
What Happens to Long Puts at Expiration?
The result of a long put option at expiration depends on whether it is in the money or out of the money. Here’s what happens in each case:
- In the Money: If the put option is in the money on or before expiration (the stock price is below the strike price), you can exercise the option to sell the underlying shares at the strike price. This allows you to lock in a higher selling price than the current market value. As the option buyer, exercising is entirely your choice.
- Out of the Money: If the put option expires out of the money (the stock price is at or above the strike price), the option expires worthless. It will be removed from your trading account, along with the premium you paid and any trading fees incurred.
XYZ Long Put Option Profit/Loss Calculations
The maximum loss on a long put is limited to the premium paid, as the put only has value if the underlying stock price falls below the strike price. However, the potential profit is significant as the put increases in value the further the stock price declines.
The table below outlines the profit and loss scenarios for a long put option at various expiration prices. For example, if the stock price drops to $75 at expiration, the holder would realize a $22 profit per share or $2,200 per contract.
| Price at Expiration | Value of Long Put | Profit/Loss |
|---|---|---|
| $110 | $0 | -$3.00 |
| $105 | $0 | -$3.00 |
| $100 | $0 | -$3.00 |
| $95 | $5 | $2.00 |
| $90 | $10 | $7.00 |
| $85 | $15 | $12.00 |
| $80 | $20 | $17.00 |
| $75 | $25 | $22.00 |
Can I Sell My Long Put Before Expiration?
Yes, and you collect its intrinsic and extrinsic value if you sell the long put before expiration. If XYZ reaches $70 with 15 days remaining until expiration, other traders will pay more than $30 for the $100-strike put due to the additional time value. The exact premium they’ll pay depends on market volatility, interest rates, and overall trading conditions.
The Risks of Long Puts
Long puts are susceptible to theta decay. Theta is an options greek that indicates how much the option premium will lose in value each day until expiration. That means, with all things being equal, your long option's value will decrease daily, regardless of what happens to the underlying asset. Should the underlying asset not move below the strike price by expiration, the holder loses the premium paid, and the option expires worthless.
How Do I Choose the Right Strike and Expiration for a Long Put?
Choosing the right strike price for a lung put requires balancing risk and reward. For long puts, and most long options strategies, a higher strike price means a lower premium, though the distance makes it harder to become profitable.
Expiration dates are similar, so you need to consider both carefully. More often than not, choosing a longer expiration date is a better option and gives your trade more time to play out to your favor.
How Does The Delta Of A Long Put Influence Its Risk/Reward Profile?
Long puts have negative delta values. Delta measures how much an option's premium changes in response to a $1 change in the underlying asset's price. For example, if the option has a -0.25 delta, the premium will likely decrease by 25 cents for every $1 increase in the underlying price.
Delta is also used to measure an option's probability of expiring ITM or OTM. For long puts, the delta is directly proportional to the probability of expiring worthless. For example, if a long put has a -0.70 delta, the trade has a 70% chance of expiring in the money.