Options Guy's Tips

Buy a long put.

  • Demo account trader
  • What to Consider When Buying Put Options in Stock Trading - dummies
  • 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.
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  • Long Put Explained | Online Option Trading Guide
  • Chuck Kowalski Updated March 11, A person would buy a put option if he or she expected the price of the underlying futures contract to move lower.

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.

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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 the stock rises, the long put option will expire worthless, and the investor will lose only the cost of the option.

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Likewise, an investor who shorted the stock will continue to lose more and more as the stock continues to climb higher. When purchasing puts, especially short term, there is a need for investors to be careful.

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If an investor buys many put contracts, their risk also increases. This is because the options can expire worthless, whereby the investor would lose the entire investment.

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  • And, you can only sell it up to an agreed-upon date.
  • How and When to Buy a Futures Put Option
  • A long put refers to buying a put optiontypically in anticipation of a decline in the underlying asset.
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  • Buying Put Options Outlook: Bearish If you're bearish on a particular stock, you could buy put options in order to profit from the predicted decline.

When to Buy Put Options There are many reasons to buy put option contracts, these can be for speculative purposes, meaning the investor believes a stock price is going to fall. Here if the stock that is already owned suddenly dropped, owning a put option would increase in value, offsetting the losses incurred from the stock.

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Shorting the Stock For investors who want to take a bearish position in the stock, shorting the stock and buying put option contracts are the most popular strategies. Both of these strategies have limited profit potential, and gain value as the stock falls, but a stock can only fall until it reaches zero. But buying a put option is a way to capitalize on the downward movement in a stock while ensuring risk is limited to the premium paid for that option contract.

"Unlimited" Potential

Breakeven The breakeven on buy a long put long put option is calculated by subtracting the premium from the strike price. Conclusion The long put is an investment practice that allows the investor to wager on the decline of the stock.

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The investor must be able to handle the potential loss of the entire premium if they are wrong. Whenever there is a decline in the underlying price, the traders can earn much more through puts ownership compared buy a long put short-selling.

In short-selling, the risks are uncapped because there is a possibility of the stock price continuing to rise without any limits.