The long put trading strategy offers an individual the right to sell an underlying stock at the specified price A as listed on the graph. When the investor purchases a put option, he or she bets that the stock will fall below the strike price before the expiration. Using a put instead of shorting the stock reduces the risk to the investor.
If the stock rises, there is no need to deliver the shares as the investor loses the cost of the option, instead of losing more and more as the stock continues to climb. Here the puts would expire worthless. There is a need for investors to be careful, particularly with short-term puts. If an investor purchases many put contracts, their risk also increases. This is because the options can expire worthless, whereby the investor would lose the entire investment.
Maximum Loss = Net Premium Paid
The maximum gain for a long put strategy is unlimited as the stock can continue to move down gaining more and more value, at least until it reaches zero.
The breakeven on a long put option is calculated by subtracting the premium from the strike price.
If a stock is trading $100 and an investor wants to buy a 90-strike price put for $2.0, then the breakeven would be $88.00.
If stock XYZ is trading $100 and the investor thinks the stock is headed down, he may buy a 90-strike price put option for a $2. If the stock trades down to $85, they will make $5 on the 90 put, but because they paid $2 for the option, their net gain will be $3.
If, however, the stock continues to trade up or never trades down to $90, they will lose their $2 investment.
The long put is an investment practice that allows the investor to wager on the decline of the stock. 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 to short-selling. In short-selling, the risks are uncapped because there is a possibility of the stock price continuing to rise without any limits.