Investor Glossary-long putInvestor Glossary-long putInvestor Glossary-long putInvestor Glossary-long putInsightful stock market charts - Click here
investor
Categories    # A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Long Put

The HTML to link to this page
 

A long put is a relatively straightforward options strategy. In a long put, a bearish investor buys a put option, waits for the value of the underlying security to fall below the strike price less the premium, and profits upon exercising the option. If the underlying security fails to fall below the strike price, the entire investment (i.e. the premium paid to purchase the put option plus commission) made by the long put trader will be lost.

For example, an investor who wants to make a long put trade on XYZ, Inc. when its stock is trading at $42 in August might buy a September 40 put option for 100 shares. Assume it costs the trader $2 purchases the put option -- $200 premium ($2 X 100 shares). If XYZ's stock price falls to $35, the put option would be in-the-money for $5 ($40 minus $35) and the purchaser of the long put could sell the 100 shares of XYZ for $40, netting $500 from this long put strategy. However, the overall profit from this long put trade would be $300 ($500 minus the $200 premium). On the downside, XYZ would need to drop to at least $38 for the long put strategy to break even. The above example does not take into account the commissions required to implement the long put strategy.

A long put is sometimes preferred to selling short. In a short sale, the investor borrows a security, sells it on the open market, buys it back when its value drops and returns the security to the broker for a net profit. Whereas in a long put, the investor only pays the premium for the right to sell the security. If the long put is successful, the investor can buy the security at the market price and immediately sell it at the higher strike price. Furthermore, a long put can carry less risk than a short sale. In a long put, the maximum loss is the premium of the put. In a short sale, potential losses are unlimited because stock prices can theoretically climb to infinity.



Rate this long put definition...

Learn about investing with the Investor Glossary Term of the Day


Click here for insightful stock market charts. Where is the market headed? The answer may surprise you. Find out
with the exclusive & Barron's recommended charts of Chart of the Day.


Popular Terms: irrevocable trust, minority interest, Zero Cost Collar, 144a, open position, EBITDA, 1035 exchange, annual return, FICO score, phantom income, in escrow, diluted share, deferred revenue, real GDP, deferred tax, current ratio, FTSE, 1031 exchange, dividends payable, margin rate, stock market close, limit order, VIX, retained earnings, per diem, debt service coverage, class C shares, stock split, average price per share, ex-dividend, command economy, ex-dividend date, reverse mortgage, liquidity ratio, option premium, risk management, quality assurance, 401a, required rate of return, cancelled check, implied volatility, covered put, LIBOR, Key Rate Duration, labor relations, wholly-owned subsidiary, APR, balance sheet, inflation


Accounting | Banking | Bonds | Brokers | Economy | Futures | Mutual Funds | Options | Real Estate | Retirement | Stocks | Taxes | Technical Analysis
Home | Term of the Day | Suggest a Term | Chart of the Day | Dogs of the Dow
©2004-2016 Investor Glossary - All rights reserved - Terms of Use