Put Option Strategies

1. Overview

A Put Option gives the holder the right to sell an underlying asset at a specified strike price on or before the expiration date. It is primarily used to speculate on price declines or to protect existing investments.

• Buyer: Profits if the asset price falls significantly.
• Seller (Writer): Profits if the asset price rises or remains flat, collecting the premium as income.

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2. Key Strategies

2.1. Long Put

The straightforward strategy of buying a put option to profit from a downward move. * Market View: Bearish (Expects a sharp price decline). * Structure: Pay a premium to buy the right to sell the asset. * Pros: Unlike short selling stock, the maximum loss is limited to the premium paid, regardless of how high the stock price rises. * Cons: Requires a significant price drop to overcome the premium cost and time decay.

2.2. Protective Put (Married Put)

A hedging strategy used to protect an existing stock position against downside risk, acting like an insurance policy. * Market View: Bullish long-term, but worried about a short-term crash. * Structure: Long Stock + Long Put. * Mechanism: If the stock price rises, the investor keeps the stock gains (minus the cost of the put). If the stock price crashes, the put option gains value, offsetting the loss in the stock. * Characteristics: Guarantees a floor price for the portfolio but involves the recurring cost of buying options.

2.3. Bear Put Spread

A vertical spread strategy designed to profit from a moderate decline in the stock price while reducing the upfront cost. * Market View: Moderately Bearish. * Structure: Buy a Put at a higher strike price + Sell a Put at a lower strike price. * Mechanism: The premium received from selling the lower strike put partially funds the purchase of the higher strike put. * Characteristics: Reduces the cost of the trade compared to a Long Put, but caps the maximum profit if the stock price falls below the lower strike price.