Long Put
Composition
Long Put is simply the purchase of one put option.
Risk/Reward
Max Reward: Unlimited potential return but equivalent to the value of the stock going down to zero because the stock can’t go any lower (obviously)
Max Risk: Limited to the premium paid up front for the option.
The break even point is where our chart crosses the horizontal axis on the long put chart. The area of importance is where the “hockey stick” looking part of the chart bends and starts going horizontally. That (horizontal) area is going to be the strike price of our option.
When you are a put buyer, no matter how far down the stock may go up, you are limited in your loss to only the amount paid for purchasing the long put.
Characteristics
The nature of a put is a short instrument. It takes advantage of underlying securities such as stocks and EFTs going down. Best used when you are bearish on market direction and is the most common choice among first time option traders/investors.
A long put allows the buyer to sell a specific security at a specified price by a specified time. A long put gives the right, but not the obligation to sell a specific underlying security.
As market moves in your direction and put becomes 100 delta it will it will match the stock price dollar for dollar as far as the stock goes down until infinity(theoretically), thus giving you an unlimited return potential. In reality it’s until the stock or underlying goes to zero.
Important
It’s important to realize that a person buying the long put is buying the right but not the obligation. You can exercise your put, sell out your put, or do whatever you want. You are never obligated as a long put buyer.
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