Options strategy: long puts

Long puts is a strategy used in options to profit from a falling stock. The advantage of a put is that the put holder (buyer) can technically short a stock even if it is not shortable with the broker due to lack of available shares to lend. Another advantage is that since the trader does not own the stocks while assuming a bearish position, the trader's loss potential if the stock goes up in value is limited to the premium paid for the option. If the underlying stock drops in value enough that it hit the put buyer's strike price before expiration, the trader can either exercise the put option or sell the put option at a now much higher price.

A put that is exercised is different from an exercised call where the stocks are delivered to the investor at the call's strike price. Once a put option is exercised, the investor assumes a short position on the stock beginning at the strike price. If the underlying stock is deep in the money, the investor exercising the put option can continue with the short position or sell to cover at the current market price.

As an example, a trader is looking to short ABCD at $98, the current market price is $100. If the trader buys a put with a strike price of $98 and the option costs $1.00, the trader would have to pay a total premium of $100 for 1 contract of ABCD put. If the stock goes down to $96 a share, the trader can exercise the option assuming a short position at strike price and buying to cover at $96 for a profit of $200 minus the premium paid at $100. If the trader selles the contract instead, the put option will now be worth more once it is sold.





Previous | Next

Stocks | Forex | Options | Economics | Bonds | History | Language learning | Technology | Technical Analysis | Fundamental Analysis
Copyright © 2014 econtrader | Risk disclosure | Terms of Use