Long Put
Buy a put option to profit from a stock going down. A simple bearish strategy with limited risk and large reward potential.
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What is a Long Put?
A long put is the simplest way to bet that a stock is going down. You buy a put option, which gives you the right to sell 100 shares at a specific price before expiration. If the stock drops, your put increases in value. If the stock goes up or stays flat, the most you lose is the premium you paid.
Think of it as the mirror image of a long call, but for bearish trades. It is also commonly used as a way to short a stock without the unlimited risk that comes with selling shares short.
How to Set It Up
- Buy 1 put option at your chosen strike price and expiration
- Strike selection: ATM puts give you the best balance of cost and profit potential. ITM puts cost more but have higher delta (they move more dollar-for-dollar with the stock). OTM puts are cheap but need a big move to pay off.
- Expiration: Give yourself 30-60 days minimum. Shorter-dated puts are cheaper but decay fast. The stock needs to move quickly with weeklies and that is a tough bet.
One contract controls 100 shares. Your maximum risk is the premium you pay upfront.
When to Use This Strategy
Use a long put when you believe a stock is going to drop. Best conditions:
- You see technical breakdown signals — support levels cracking, bearish patterns
- Bad news is coming or you expect weak earnings
- The overall market looks shaky and you want targeted downside exposure
- Implied volatility is relatively low so you are not overpaying
Long puts are also a good alternative to shorting stock. When you short shares, your risk is theoretically unlimited if the stock keeps going up. With a long put, your loss is capped at what you paid.
Example Trade
Stock XYZ is trading at $100. You think it will drop to $90 in the next 45 days.
- Buy 1 XYZ $100 put expiring in 45 days for $4.50
- Total cost: $4.50 x 100 = $450
- Breakeven at expiration: $100 - $4.50 = $95.50
If XYZ drops to $90 at expiration, your put is worth $10. That is a $1,000 value minus the $450 you paid = $550 profit (122% return).
If XYZ stays at $100 or goes higher, the put expires worthless and you lose your $450.
Risk and Reward
- Max profit: Substantial. The lower the stock goes, the more the put is worth. Theoretically the stock can go to $0, making the put worth the full strike price minus premium.
- Max loss: The premium you paid. In our example, $450. Known before you enter.
- Breakeven: Strike price minus the premium. The stock needs to be below $95.50 at expiration for you to make money.
Like long calls, most OTM long puts expire worthless. Probability of profit is usually under 50%. You need the stock to move enough, fast enough.
Tips and Common Mistakes
- Timing is everything. Being right about direction but wrong on timing is the most common way traders lose money on long puts. The stock might drop eventually, but if it does not drop before your expiration, you lose.
- Do not fight an uptrend. Buying puts against a stock in a strong uptrend is a losing game. Wait for confirmation of a reversal before entering.
- Be careful around earnings. IV is usually inflated before earnings. If you buy a put before earnings, IV crush after the announcement can kill your trade even if the stock drops a little.
- Have a plan to exit. Decide before you enter: at what profit do you take money off the table, and at what loss do you cut it? A 50-100% gain on the option and a 50% loss are reasonable targets.
Related Strategies
- Bear Put Spread — reduces your cost by selling a lower strike put, but caps your profit
- Long Call — the bullish version of the same concept
- Protective Put — buying a put to hedge shares you already own
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