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