Options Trading Strategies | The Long Put

The buyers of a put think about how to benefit from the falls of price of the underlying one or be protected from them. They have a downward vision of the market and usually hope that it should increase the volatile nature.

New York - "GREED STREET or Wall Street.....
New York – “GREED STREET or Wall Street…U decide?” Colorful tags below (Photo credit: David Paul Ohmer)

The long put option strategy is a basic strategy in options trading where the investor buy put options with the belief that the price of the underlying security will go significantly below the striking price before theĀ  expiration date. His risk, his potential of loss, is limited to the premium whereas his potential of benefit is unlimited to the expiration on a descending market.

The threshold of profitability in this operation, is the price of exercise – the price of the premium. On the other hand to emphasize that his delta increases up to-1 as they lower the prices of the underlying assets.

More BEAR are the expectations of the market, the put must buy to itself in the position OTM as deep as possible, that is to say that the lowest price of exercise must be for the buyer of the put. Compared to short selling the stock, it is more convenient to bet against a stock by purchasing put options as the investor does not have to borrow the stock to short. Additionally, the risk is capped to the premium paid for the put options, as opposed to unlimited risk when short selling the underlying stock outright.

Let’s put an example: A Spanish company has come to an agreement with an American company tolling that to pay the Spaniard in 3 months a quantity in dollars. The Spanish company believes that the dollar can re-point opposite to the current levels that the euro shows, for what it does not want to cover this risk (it would win less), so he buys a put to 1,28, which is the current change (1,28 dollars = to 1 euro).


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