Long Put

A long put refers to a put option that individuals can purchase, anticipating that the price of the underlying asset will fall in value. The term “long” in this phrase does not refer to the period of time or length of something. Instead, it indicates the trader’s aim to sell the option they previously purchased at a higher price.

Long put explained

Generally, a long put has a price at which a put can be exercised. It is also referred to as a strike price. A strike price is the price at which an individual purchasing a put can sell the underlying asset.

The trader will need to exercise the option in order to sell the underlying at the strike price. In this case, exercising is not necessary. Rather, the trader can exit the option by selling it before the expiration date.

Note, however, that American and European options are slightly different. While if it is an American option, a long put can be exercised before the expiration date. The European options needed to be exercised on the expiration date. 

Shorting stock vs. long put strategy

Rather than shorting shares, bearish investors should be using a long put strategy. Because of the fact that the stock has not capped upside, a short stock position comes with higher risks. Both long put and short stock positions have limited profit potentials. However, a put option tends to increase in value. 

The disadvantage of the put option is that the underlying price needs to fall before the option’s expiration date. Otherwise, the trader will not have any profits.

Usually, traders sell a short stock at a specific price, in hopes that they will be able to purchase it again at a lower price. Similarly, a put option can be sold when the underlying stock falls and the value of the put option rises. In order to profit from the trade, if the option is exercised, the trader needs to buy the underlying stock.

Short put option vs. long put option

In the long put option the trader does two things: pays money to enter the position, and in exchange for paying money to enter the position at a particular price, they have complete upside potential.

Long put options profit from a rise in volatility. So with a long put option, if a stock was trading out $100, for example, a trader might buy a 98 strike put option for $1 and hope that stock goes down below their break-even point. The break-even point here would be around $97. So the strike price of the contract is $98, plus the premium that the trader paid to break even down to around $97. So it would actually make money if as long as the stocks were to go down as low as $97 and lower.   

Let us take the other side of this trade and examine the actions of the short put seller. The seller would be collecting a premium from a long put option buyer, in this case a $100 from our example. And in exchange for collecting this premium, which is the maximum amount of money that the seller can make, they would take all of the risk that is associated with the stock price gradually lowering to the point that it becomes lower than the strike people. So if a seller would want to sell a 98 strike put option, and collect a $1 in premium, which is a $100 in notional value for the option contract, that means that their break-even price is also $97 on the stock price.