What is a long put?
Generally, it refers to traders purchasing put options when they anticipate a drop in the price of the underlying assets. The term “long” refers to buying an option instead of the amount of time before the option expires.
Traders purchase options with the hope that they can sell them at a set price in the future and cover their profit. Investors can use it to hedge a dropping market or when they speculate on a price drop. You can limit the downside risk using a long put strategy.
They have strike prices which refer to the value at which you will have to sell the underlying asset, like in the following long put example. If a stock with a strike price of $100, it means that you can sell the stock at $100 even if the price drops to $80.
But if the price rises over $100, then it becomes useless since you’ll be selling it at $100 when the cost is $120.
What is a long put option strategy?
Long puts give traders the right to sell their underlying financial asset at a strike price. Generally, if there were no put options, then the primary way to benefit from a down-trending market would be to sell the stocks short.
Unfortunately, the issue with shorting the financial asset this way is you’re exposing your investment to unlimited risks. But when you replace it with put, you will limit your long put max loss to the contract’s price.
If the price rises, you won’t have to deliver on the shares; instead, they will expire worthless. Or you can sell them at a loss; unfortunately, you have to be careful when dealing with several option contracts, especially with an out-of-money put.
They can end up expiring worthless, affecting your investment in the long run. Therefore, you can use long puts to protect the value of your shares; these are protective puts.
Is long put a good strategy?
If done correctly and the market goes against you, then it can be quite beneficial. It can protect your existing positions from a considerable loss in case the market goes against your investment.
If you feel like the market is about to go against your open positions, you can go long, and since it has a strike price, then it can protect your investment while you wait for it to improve in the future. The long put can be excellent for bearish investors; instead of shorting stocks.
If the price continues rising, then the put may go out of money, leaving you with a loss. But it would have served its purpose; after all, this strategy can safeguard your other investment.
This means that you’ll need a reliable long put calculator for a substantial long put payoff. With a reliable long put payoff formula, you can benefit by simply buying put options.
Long Put vs Short Put
Options are usually grouped together by duration, with the short-term option expiring within a year. Long-term options have a shorter period than the LEAPs, which are ideal for a number of years.
In terms of price, the Short-term options are cheaper than the LEAPs and long-term options. The long-term options are more affordable than LEAPs but more expensive than the short-term options. But one of their key similarities is that they can be both European-or-American style options.
The government does not tax short-term option the same way as the LEAPs and long-term options. This option uses a short-term rate, while the others use a long-term capital gains rate.
Is the long put a bullish or a bearish strategy?
It is a bearish position in any market; in fact, it includes a trader purchasing a put option. Traders go long when they believe that the price of their financial assets will drop.
Therefore, it is the best option for a bearish trader instead of shorting an asset that has limited profit potential.