What is a long put?
A long put strategy is when someone simply buys a put option contract with the intention of speculating on a decline in the price of the underlying asset. Long put options give the buyer the right to sell shares of the underlying asset at the strike price on or before expiration.
This is a levered investment, meaning each contract is equivalent to selling 100 shares of stock. Using a long put option gives you the opportunity to make money if the stock price falls without having to spend as much money as you would if you sold the stock. You also know exactly how much you can lose - just the amount you paid for the option contract.
When to use a long put strategy
When you are highly confident the price of an asset will go down, you can buy a long put as a speculative strategy. This gives you the right to sell the asset at a set price by a certain date in the future. The further out-of-the-money the strike price is, the less it will cost, but there is also a lower chance that buying the put will succeed as a trade.
How to manage a long put position
Be prepared to pay up for premium on your put option because its price is typically more expensive than the price of a call option. This pricing difference happens because investors are willing to pay more to protect their investments from downside risk.
When you enter a long put strategy, time decay negatively affects the value of your option position. You will want implied volatility to rise and the price of the underlying to fall because when both happen the value of your put will increase.
Long put maximum profit potential
The potential profit a trader can make on this trade is limited only by how much the stock can decline. For example, in the very rare case a stock falls to zero, you make the entire price of the put contract minus what you paid for it.
Long put maximum loss potential
The most you can lose if the stock price fails to fall or implied volatility fails to rise is what you paid for the put option.