Long Puts (Buying Puts)
Learn the art of long put options and how they can protect against losses or yield profits as we break down the strategy. Discover the mechanics of buying put options, illustrated with an example involving Apple shares. Explore potential benefits and risks in this informative post.
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Following on from part one here is a breakdown of long puts. If you’d like to check out part one: Options Terminology
Firstly, what is a long put? The purchase of a put option
A long put gives the contract holder (buyer) the right but not the obligation to sell a specified quantity of an Underlying Asset, such as 100 Apple shares, at a pre-agreed price (Strike Price) before or on a specific date (Expiration Date)
Puts are commonly used as a form of protection against potential losses and can be used by investors as a way to profit if the value of the Underlying Asset decreases without owning the asset
Example:
Apple shares are trading at $170.00
I can buy an Apple $165.00 (Strike Price) Put for $3.00 (Premium) that expires on 16th June (Expiration Date)
The contract contains 100 shares, resulting in a total premium of $300.00
To breakeven, Apple would need to decrease to $162.00 (Strike Price - Premium) by expiration
By expiration, if Apple’s shares are trading at $150.00, I have the right to sell 100 Apple shares for $165.00 each
I have mitigated potential losses as I can sell the shares for $165.00 each instead of $150.00
If I do not own 100 Apple shares, I could buy the shares at $150.00 each and sell them for $165.00 with $15.00 in proceeds and $12.00 profit ($15.00 - $3.00 Premium) per share
Total Proceeds: $1,500.00
Total Premium: $300.00
Total Profit: $1,200.00
Remember!
When investing you may incur additional costs such as broker and exchange fees
Capital at risk when investing