A long put is one of the most simple options strategies. The trader buys a put contract, and then waits for the price to move down. The put can be purchased in the money, at the money, or out of the money, and the trade goes into profit when the price moves below the strike price plus the premium (the amount paid for the put). An in the money put will have a higher premium than an at the money put, which will have a higher premium than an out of the money put, but the out of the money put needs the price to move further than the in the money or at the money puts before it will be profitable.
Making a Long Put
- Purchase a single put contract
- Wait for the price to move below the strike price plus the premium
- Sell or exercise the put to retrieve the profit
Risk and Reward
As shown on the risk / reward chart (view the full size chart), the risk of a long put is low, and is limited to the premium regardless of how far the price moves up (against the trade). The risk of a long put is calculated as :
Maximum Risk = Premium
Loss = Premium (if price >= strike price upon expiration)
The reward of a long put is potentially unlimited, as the price could move down (with the trade) by any amount. The profit of a long put is calculated as :
Maximum Profit = Unlimited
Profit = Strike Price - Underlying Price - Premium
