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Long Put Options Trading Strategy Explained

Published on Thursday, April 19, 2018 | Modified on Wednesday, June 5, 2019

Long Put

Long Put Options Strategy

Strategy LevelBeginners
Instruments TradedPut
Number of Positions1
Market ViewBearish
Risk ProfileLimited
Reward ProfileUnlimited
Breakeven PointStrike Price of Long Put - Premium Paid

A Long Put strategy is a basic strategy with the Bearish market view. Long Put is the opposite of Long Call. Here you are trying to take a position to benefit from the fall in the price of the underlying asset. The risk is limited to premium while rewards are unlimited.

Long put strategy is similar to short selling a stock. This strategy has many advantages over short selling. This includes the maximum risk is the premium paid and lower investment. The challenge with this strategy is that options have an expiry, unlike stocks which you can hold as long as you want.

Let's assume you are bearish on NIFTY and expects its price to fall. You can deploy a Long Put strategy by buying an ATM PUT Option of NIFTY. If the price of NIFTY shares falls, the put option will now be in-the-money with an intrinsic value. This could result in unlimited profits. However, if the price of NIFTY rises, the put option will expire worthlessly and the maximum loss incurred will be the premium paid.

This strategy has limited risk and unlimited rewards.

How to use the long put options strategy?

The long put strategy looks like as below for NIFTY which is currently traded at ₹10400 (NIFTY Spot Price):

Long Put Orders - NIFTY
OrdersNIFTY Strike Price
Buy 1 ATM PutNIFTY18APR10400PE

Suppose NIFTY shares are trading at 10400. If we are expecting the price of NIFTY to go down in near future, we buy 1 NIFTY Put Option to implement this strategy.

If NIFTY falls as we expected, the put option will be in-the-money and we will make profits from it. There is a potential for unlimited profits in this scenario.

If NIFTY rises, the put option expires worthless. We lose the premium paid initially to get into this trade. This is also the maximum loss scenario.

When to use Long Put strategy?

A long put option strategy works well when you're expecting the underlying asset to sharply decline or be volatile in near future.

Example

Example 1 - Stock Options

Let's take a simple example of a stock trading at ₹40 (spot price) in June. The option contracts for this stock are available at the premium of:

  • July 40 Put - ₹2

Lot size: 100 shares in 1 lot

  1. Buy July 40 Put = 100 * 2 = ₹200 Premium Paid

Net Debit: ₹200

Now let's discuss the possible scenarios:

Scenario 1: Stock price remains unchanged at ₹44

  • Buy July 40 Put: Expires Worthless
  • Net debit was ₹200 which was paid as premium initally.
  • Total Loss = ₹200.

In this scenario, we lost total ₹200 which is also the maximum loss in this strategy.

Scenario 2: Stock price goes up to ₹50

Same as scenario 1:

  • Buy July 40 Put: Expires Worthless
  • Net debit was ₹200 which was paid as premium initally.
  • Total Loss = ₹200.

In this scenario, we lost total ₹200 which is also the maximum loss in this strategy.

Scenario 3: Stock price goes down to ₹30

  • Buy July 40 Put Expires in-the-money with an intrinsic value of (40-30)*100 = ₹1000
  • Net debit was ₹200 which was initially paid to take the position.
  • Total Profit = 1000 - 200 (net premium paid) = ₹800

This profit rises as the price of the underlying asset fall further.

Example 2 - Bank Nifty

Short Put Example Bank Nifty
Bank Nifty Spot Price8900
Bank Nifty Lot Size25
Short Put Options Strategy
Strike Price(₹)Premium(₹)Total Premium Paid(₹)
(Premium * lot size 25)
Buy 1 Put Option880040010000
Net Premium40010000
Breakeven(₹)Strike price of the Long Put - Net Premium
(8800 - 400)
8400
Maximum Possible Loss (₹)Net Premium Paid * Lot Size
(400*25)
10000
Maximum Possible Profit (₹)UnlimitedUnlimited
On Expiry Bank NIFTY closes atNet Payoff from 1 Put Options Brought (₹) @8800Net Payoff (₹)
800020000
(8800-8000)*25
10000
20000-10000
820015000
(8800-8200)*25
5000
15000-10000
840010000
(8800-8400)*25
0
10000-10000
8600-5000
(8800-8600)*25
-5000
5000-10000
88000-10000
0-10000
90000-10000
0-10000
long put example bank nifty

Market View - Bearish

When you are expecting a drop in the price of the underlying and rise in the volatility.

Actions

  • Buy Put Option

Let's assume you're Bearish on Nifty currently trading at 10,400. You expect it to fall to 10,000 level. You buy a Put option with a strike price 10,000. If the Nifty goes below 10,000, you will make a profit on exercising the option. In case the Nifty rises contrary to expectation, you will incur a maximum loss of the premium.

Breakeven Point

Strike Price of Long Put - Premium Paid

The breakeven is achieved when the strike price of the Put Option is equal to the premium paid.

Risk Profile of Long Put

Limited

The risk for this strategy is limited to the premium paid for the Put Option. Maximum loss will happen when price of underlying is greater than strike price of the Put option.

Reward Profile of Long Put

Unlimited

This strategy has the potential to earn unlimited profit. The profit will depend on how low the price of the underlying drops.

Max Profit Scenario of Long Put

Underlying goes down and Option exercised

  • Maximum Profit = Unlimited
  • Maximum Profit Achieved When Price of Underlying = 0
  • Profit = Strike Price of Long Put - Premium Paid

Max Loss Scenario of Long Put

Underlying goes up and Option not exercised

  • Max Loss = Premium Paid + Commissions Paid
  • Max Loss Occurs When Price of Underlying >= Strike Price of Long Put

Advantage of Long Put

Unlimited profit potential with risk only limited to loss of premium.

Disadvantage of Long Put

You may incur 100% loss in premium if the underlying price rises.

How to exit?

  • Sell the put option and book profits.
  • Sell ITM put option and OTM Put.
  • Wait for the Put to expire

Simillar Strategies

Protective Call, Short Put, Long Straddle

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