The Long Put Strategy – Betting on the Downside
Jim Graham

Americans are optimists; we think that everything is going to look better tomorrow, including stock prices. So we naturally tend to favor call options, because when the stock price goes up we will make a nice profit. In fact, when exchange traded options were introduced in 1973 there were no put options available, only calls! Put options on stocks didn't begin trading until four years later, in June 1977.

The fact is, however, that the stock markets (and the individual stocks they are comprised of) do not always go up. They can have long seasons of bearish activity. Buying put options allows you to profit when this happens.

When you buy a put option on a stock, you acquire the right to sell 100 shares of stock. This option is a contract that specifies the price (the strike price) you have the right to sell the stock at, and by what date (the expiration date). The put option buyer has the right to sell the stock at the strike price, but doesn't have to. The put option seller, on the other hand, has the obligation to buy the stock at the strike price if the put is assigned.

Most investors find it easier to understand calls, but the put gives the investor many advantages not available with calls. So the time spent learning about puts and how to use them properly is time well spent. Many of the option terms used are the opposite depending on whether they are used with calls or puts.

When talking about put options, in-the-money refers to a put whose strike price is higher than the current stock price. At-the money still describes an option whose strike price and stock price are the same, but an out-of-the-money put has a strike price that is lower than the current stock price. The out-of-the-money put option position has higher leverage and more risk compared to an at-the-money or in-the-money option.

Long Put Strikes Example

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