The Long Put strategy is a go-to options technique when you expect a sharp decline in an asset’s price. It offers high reward potential with limited, predefined risk, which is best for the bearish traders and hedgers alike.
A Long Put involves buying a put option, which gives you the right to sell the underlying asset at a fixed price. This fixed price is known as the strike price and the option must be exercised before it expires.
You pay a premium to obtain this right. If the asset’s price drops below the strike price, your put gains value.
A long put strategy is useful when you expect the asset’s price will decline. It allows you to benefit from downward movement without the need to short sell. Additionally, it can serve as a hedge to protect your portfolio against potential losses in a falling market.
| Feature | Details |
|---|---|
| Market View | Bearish |
| Risk | Limited to premium paid |
| Reward | High (maximum = Strike Price - Premium) |
| Breakeven | Strike Price (Premium Paid) |
| Leverage | Yes, small investment controls larger value |
Here’s a real-life example of how a long put option strategy works: A stock is trading at ₹100. You buy a put option with a strike price of ₹95, paying a ₹3 premium, expecting the price to drop.
If the stock falls to ₹85, you sell at ₹95 and buy at ₹85, gaining ₹10. After subtracting the ₹3 premium, your net profit is ₹7.
If the stock stays above ₹95, the option expires worthless, and your maximum loss is ₹3. This strategy helps you profit from a price drop while limiting your risk.
The stock falls to ₹85. You exercise your option, sell at ₹95 and buy at ₹85.
Profit = ₹95 - ₹85 - ₹3 = ₹7 per share
The stock stays above ₹95. The option expires worthless.
Loss = ₹3, which is the premium paid.
Here’s why you can choose long put strategy:
The long put strategy is well-suited for bearish traders looking for high impact returns without taking on the risks of short selling. It also appeals to investors who want to hedge against potential downside in their stock holdings, offering a protective layer in uncertain markets.
Additionally, it is an attractive choice for investors seeking asymmetrical risk-reward opportunities, where the potential gain can far exceed the limited risk of the premium paid.
When using a long put strategy, it is important to choose expiration dates wisely. While closer expiry options may be cheaper, they also come with higher risk due to limited time for the trade to work in your favor.
Moreover, rising volatility can increase the value of puts, so always keep an eye on implied volatility before entering a position. For more advanced risk control, consider combining long puts with other strategies to balance potential returns and reduce exposure.