Long Put

1. Definition

A Long Put is a basic bearish options strategy. It involves buying a put option, which gives the investor the right, but not the obligation, to sell the underlying asset at a specific strike price on or before the expiration date. It is an alternative to short selling stock, offering similar profit potential with strictly defined risk.

2. Market View

• Bearish: Used when the investor expects the stock price to fall significantly before the expiration date. A sharp decline is needed to offset the cost of the premium and time decay.

3. Setup

• Action: Buy to Open a Put Option.
• Cost: Debit transaction (The investor pays a premium to the seller).

4. Profit & Loss Profile

4.1. Max Profit

Substantial The profit potential is significant, capped only because the stock price cannot fall below zero. * $$Max Profit = (Strike Price - Premium Paid) \times 100$$ (since stock price goes to 0)

4.2. Max Loss

Limited Even if the stock price skyrockets, the investor is not obligated to exercise the option. The maximum loss is limited to the premium paid upfront. This makes it safer than short selling, where losses can be theoretically infinite.

4.3. Break-even Point

The stock price must fall below the [Strike Price - Premium Paid] for the trade to become profitable.

5. Pros & Cons

• Pros: Allows investors to profit from a market downturn with limited risk. It can also act as portfolio insurance (Protective Put) to hedge against drops in owned assets.
• Cons: Like all long options, it suffers from Time Decay (Theta). If the stock price remains flat or falls too slowly, the option may expire worthless, resulting in a total loss of the premium.