
Published on Thursday, April 19, 2018  Modified on Monday, April 26, 2021
Strategy Level  Beginners 
Instruments Traded  Put 
Number of Positions  1 
Market View  Bearish 
Risk Profile  Limited 
Reward Profile  Unlimited 
Breakeven Point  Strike 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 inthemoney 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.
The long put strategy looks like as below for NIFTY which is currently traded at Rs 10400 (NIFTY Spot Price):
Orders  NIFTY Strike Price 

Buy 1 ATM Put  NIFTY18APR10400PE 
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 inthemoney 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.
A long put option strategy works well when you're expecting the underlying asset to sharply decline or be volatile in near future.
Let's take a simple example of a stock trading at Rs 40 (spot price) in June. The option contracts for this stock are available at the premium of:
Lot size: 100 shares in 1 lot
Net Debit: Rs 200
Now let's discuss the possible scenarios:
Scenario 1: Stock price remains unchanged at Rs 44
In this scenario, we lost total Rs 200 which is also the maximum loss in this strategy.
Scenario 2: Stock price goes up to Rs 50
Same as scenario 1:
In this scenario, we lost total Rs 200 which is also the maximum loss in this strategy.
Scenario 3: Stock price goes down to Rs 30
This profit rises as the price of the underlying asset fall further.
Bank Nifty Spot Price  8900 
Bank Nifty Lot Size  25 
Strike Price(Rs )  Premium(Rs )  Total Premium Paid(Rs ) (Premium * lot size 25)  

Buy 1 Put Option  8800  400  10000 
Net Premium  400  10000 
Breakeven(Rs )  Strike price of the Long Put  Net Premium (8800  400)  8400 
Maximum Possible Loss (Rs )  Net Premium Paid * Lot Size (400*25)  10000 
Maximum Possible Profit (Rs )  Unlimited  Unlimited 
On Expiry Bank NIFTY closes at  Net Payoff from 1 Put Options Brought (Rs ) @8800  Net Payoff (Rs ) 

8000  20000 (88008000)*25  10000 2000010000 
8200  15000 (88008200)*25  5000 1500010000 
8400  10000 (88008400)*25  0 1000010000 
8600  5000 (88008600)*25  5000 500010000 
8800  0  10000 010000 
9000  0  10000 010000 
When you are expecting a drop in the price of the underlying and rise in the volatility.
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.
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.
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.
This strategy has the potential to earn unlimited profit. The profit will depend on how low the price of the underlying drops.
Underlying goes down and Option exercised
Underlying goes up and Option not exercised
Unlimited profit potential with risk only limited to loss of premium.
You may incur 100% loss in premium if the underlying price rises.
Add a public comment...