Buying Long Puts-Options trading(method 2)

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Buying Long Puts-Options trading

Hi friend, We already discussed options trading and long call strategy. In this article, we are going to see buying long puts for beginners.

Buying long puts
Buying long puts

Buying puts

A put option gives the holder the right to sell the underlying at a set price before the contract expires. This is a preferred strategy for traders who:

  • Looking to take on less risk than short-selling a stock, ETF, or index that you are bearish on
  • Taking advantage of falling prices with leverage

As the price of the underlying decreases, a put option gains value, the opposite of how a call option does. Traders can also profit from falling prices when short-selling, but the risk with a short position is unlimited since there is theoretically no limit to how high a price can rise. If the underlying price exceeds the strike price of a put option, the option simply expires worthless.

How to buy long put options trading for beginners
long put example

Buying long puts example

If a stock’s price drops from $60 to $50 or lower based on poor earnings, you don’t want to sell the stock short in case you are wrong. Instead, you can buy the $50 put for a premium of $2.00. The most you will lose is the premium of $2.00 if the stock does not fall below $50.

Assuming you are right and the stock drops all the way to $45, you would make $3 ($50 minus $45. less the $2 premium)

Risk/Reward: Buying long puts

Unlike a long call option, a long put option has a limited loss potential and a maximum profit potential because the underlying price cannot drop below zero.

Before entering into options trading please refer to INVESTOPEDIA

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