What is a Long Put?

//What is a Long Put?
What is a Long Put? 2017-10-05T06:37:50+00:00

Definition: A long put is a common option strategy in which investors buy a put option expecting the market price of the underlying asset will drop considerably below the strike price before maturity.

What Does Long Put Mean?

What is the definition of long put? When investors expect or speculate that the market price of an underlying asset will drop, they buy a long put to leverage their exposure to the price decline. Investors already own the underlying asset and enter a long put contract to protect their holdings.

The long put option holder can, either sell the put before maturity to realize gains, or hold it to maturity when he must buy the underlying asset at the market price, and sell it at the strike price. A long put minimizes risk to losing the premium paid for the option and maximizes profit unlimitedly to the point that the market price falls to zero.

Let’s look at an example.

Example

Peter owns 200 shares of a food processing company that currently trade at $65. Peter trusts the market and the rumors that speculate that the stock will decline due to lower sales in the foreign markets, so he wants to protect his holdings. Peter buys a long put at a strike price of $60 for $2 per share.

Therefore, Peter pays $200 to acquire 100 shares of the food processing company, expecting that the price will decline significantly below the strike price of $60 before maturity.

If the market price drops to $50, Peter has the right to exercise his put option by buying 100 shares for $50 and selling 100 shares in the open market for $60, thereby realizing a gain of ($60 x 100) – ($50 x 100) = $1,000. Therefore, his net profit is $1,000 – $200 = $800.

If the stock price rises to $80, Peter loses $200 that he paid for the long put.

Summary Definition

Define Long Put: A long put is an investment tactic where the investor purchases an option hoping that the stock price will fall below the strike price of the option.