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Long Put Option Strategy

Long Put Option Strategy

What is Long Put Option Strategy?

  • Long Put option' is again the most basic & simplest strategy among all. It is recommended or implemented when we expect the underlying asset to show significant downside move in near term i.e., this is directional strategy where we are bearish on the market direction. Buying a Put or Long Put is the same as the future but capped with upside risk and requires less margin for implementation.

When to Execute?

  • When we are bearish on market direction and expect price to move significant downside, Long put is also used to hedge long portfolios in case there is sense for a crash in the near term. This works as Insurance against long trades.

What is the Trade?

  • Generally, under Long Put, buying an ATM put option will suffice the purpose, we can also buy ITM and OTM Put option, risk reward will be different in all the cases.

Breakeven Point

  • Break Even of Long Put = Strike Price - Premium Paid.

What will be maximum profit?

  • Undefined if market moves below Breakeven point (i.e., Strike Price – Premium Paid).

What will be your maximum loss?

  • Since it’s a net debit trade you pay for buying the put option upfront i.e., Premium. Your maximum risk is capped to premium paid. Total loss can be calculated by (Net Premium Paid* Lot Size). If the market closes between Strike price and Breakeven, the buyer of Put will recover premium by the amount of Strike – Spot.

What are the advantages?

  • Unlimited profit potential with capped risk. Possibility of greater leverage than selling naked futures. Required less margin as compared to Futures.

What are the disadvantages?

  • 100% potential loss of premium in case of inappropriate strike, choice of stock, time decay. Greater leverage could prove detrimental in case the expected outlook fails.

Example for Long Put:

  • Nifty future price is 15500. A Long Put can be devised by Buying one lot of 15500 PE (ATM) @ 165. Net Premium Paid or Received = Rs. (-165). Undefined profit will if market closes below at 15500 + 165 = 15335, Max Loss if underlying stays above the strike i.e., 15500.