The Strategy

Put option long, Long Put vs Short Put – Option Trading Strategies

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A put option is the right to sell the underlying futures contract at a certain price. Buying Puts When traders sell a futures contract they profit when the market moves lower.

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A put option has a similar profit potential to a short future. When prices move downward the put owner can exercise the option to sell the futures contract at the original strike price.

This is when the put will have the same profit potential as the underlying futures. However, when prices move up you are not obligated to sell the future at the strike price, which is now lower than the futures price because that would create an immediate loss.

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Why would any trader short a future instead of buying a put? The potential to profit on a put option does not come without a cost. This payment is similar to an insurance policy premium and, is called the option premium.

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The buyer of a put option pays a premium to the seller of a put option. As a result of the added cost of the premium, the profit potential for a put is less than the profit potential of a futures contract by the amount of premium paid.

The price of the futures contract must fall enough to cover the original premium for the trade to be profitable.

Note: While we have covered the use of this strategy with reference to stock options, the long put is equally applicable using ETF options, index options as well as options on futures. However, for active traders, commissions can eat up a sizable portion of their profits in the long run. If you trade options actively, it is wise to look for a low commissions broker.

The breakeven point for warrant option put is where the profit on the futures contract that you can purchase at the strike price is equal to the premium paid for the call.

If you have written the put option, then you receive the premium in return for the accepting the risk that you may need to buy a futures contract at a higher price than the current market price for that future. The most a put option seller can lose is the full strike price minus the premium received.

Long Put Option Strategy The long put options trading strategy offers an individual the right to sell an underlying stock at the specified price, point A, as listed on the graph. When the investor purchases a put option, he or she is betting that the stock will fall below the strike price before the expiration date. Using a put instead of shorting the stock reduces the risk to the investor as they can only lose the cost of the put, verses unlimited risk associated with shorting the stock.

If you sell a put option, and the underlying future drops to You will have an 80pt loss minus the premium you took in which will only offset a small portion of the loss.

Put sellers will profit as long as the futures price does not fall beyond the value of the premium received subtracted from the strike price. For example, if you sell a put strike and receive a premium of 6.

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You will profit as long as the future is above 94 strike minus the put premium. The breakeven point is exactly the same for the put seller as it is for the put buyer.

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Summary Put options are the right to sell the underlying futures contract. Buyers of the put have some put option long against adverse price movements in put option long they have limited risk only the premium paid is at risk. On the other hand, hedgers can also use puts to protect against a declining price.

Long Calls and Puts

Using our put selling example, if you sold the put and the price of the underlying declined to 80 at expiration. If the buyer exercised his option, you would be assigned and have the futures put to you at despite the fact it was trading fully 20 points lower in the market.

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While buyers have limited risk when buying puts and calls, the seller has substantial and virtually unlimited risk.