What is a 'Long Put'
A long put is an options strategy in which a put option is purchased as a speculative play on a downturn in the price of the underlying equity or index. In a long put trade, a put option is purchased on the open exchange with the hope that the underlying stock falls in price, thereby increasing the value of the options, which are "held long" in the portfolio. A long put option could also be used to hedge a long stock position.
BREAKING DOWN 'Long Put'A long put option may also be exercised before the expiration if it is an American option and favorable to the option holder. If the option is exercised early or expires "in the money," the option holder would be short the underlying asset. The options can either be sold prior to expiration for a profit or loss, or held to expiration, at which time the investor must purchase the stock at market prices, then sell the stock at the stated exercise price.
Long Put Strategy vs. Shorting Stock
A long put is a favorable strategy for bearish investors, rather than selling short stock. A short stock position theoretically has unlimited risk since the stock price has no capped upside. However, a short stock position has limited profit potential, since a stock cannot fall below $0 per share. A long put option is similar to a short stock position because the profit potentials are limited. In the case of a short stock position, the investor's maximum profit is equivalent to the initial sale price. However, the maximum profit of a long put option is equivalent to the strike price less the premium paid for the put option.
The long put strategy represents an alternative to simply selling a stock short, then buying it back at a profit if the stock falls in price. Options can be favored over shorting due to increased liquidity, especially for stocks with smaller floats, or due to increased leverage and a capped maximum loss, since the investor cannot lose more than the premiums paid. The maximum profit is also capped and equivalent to the strike price less the premium paid for the put option.
Long Put Options to Hedge
A long put option could also be used to hedge against unfavorable moves in a long stock position. This hedging strategy is known as a protective put, or married put.
For example, assume an investor is long 100 shares of hypothetical conglomerate EFF Corp. at a price of $25 per share. The investor is bullish on the stock, but fears that the stock may fall over the next month. Therefore, the investor purchases one put option with a strike price of $20, which expires in one month. The investor's hedge caps the loss to $500, or 100*($25-$20), less the premium paid for the put options. Conversely, if the investor was bearish over the short term and did not own shares of the company, the investor could have purchased a put option on EFF Corp.