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Home / Education / Futures & Options Strategy Guide / Long Put

Long Put

Overview

Pattern evolution:
Long Put

Learn 21 futures and options trading strategies in this complimentary,  easy-to-read guide. Download Now >>

When to use: When you are bearish to very bearish on the market. In general, the more out-of-the-money (lower strike) the put option strike price, the more bearish the strategy.

Profit characteristics: Profit increases as markets fall. At expiration, break-even point will be option exercise price A – price paid for option. For each point below break-even, profit
increases by additional point.

Loss characteristics: Loss limited to amount paid for option. Maximum loss realized if market ends above option exercise A.

Decay characteristics: Position is a wasting asset. As time passes, value of position erodes toward expiration value.

CATEGORY: Directional
SYNTHETICS: Short instrument, long call

Example

Long Put

Scenario:
Pork Bellies have been trading at contract highs of between 75 and 85 cents per pound. The trader feels that a major decline is very likely. However, the trader is not sure when it will come. He decides to buy a long-term put option. By doing this he initially has very little time decay. He can ride out a temporary upward move and still be in for the big break.

Specifics:
Underlying Futures Contract: February Pork Bellies
Futures Price Level: 80.15
Days to Futures Expiration: 210
Days to Options Expiration: 180
Option Implied Volatility: 33.2%
Option Position: Long 1 Feb 76 Put – 5.10 ($2040)

At Expiration:
Breakeven: 70.90 (76.00 strike – 5.10 premium)
Loss Risk: Limited to the premium paid. Loss above 70.90 with maximumloss of 5.10 above 76.00.
Potential Gain: Unlimited, with profits increasing as the futures fall further and further past 70.90 breakeven.

Things to Watch:
This trader must be very bearish, with volatility increasing, to make this trade profitable. If held to expiration, the futures would have to fall more than 10% by expiration just to break even. Check the follow-up strategies if the futures fall or volatility rises to the levels expected before expiration.

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Additional Futures & Options Strategies

  • How to Use This Guide
  • Long Futures
  • Long Synthetic Futures
  • Short Synthetic Futures
  • Long Risk Reversal
  • Short Risk Reversal
  • Long Call
  • Short Call
  • Short Put
  • Bull Spread
  • Bear Spread
  • Long Butterfly
  • Short Butterfly
  • Long Iron Butterfly
  • Short Iron Butterfly
  • Long Straddle
  • Short Straddle
  • Long Strangle
  • Short Strangle
  • Ratio Call Spread
  • Ratio Put Spread
  • Ratio Call Backspread
  • Ratio Put Backspread
  • Box or Conversion

Contents Courtesy of CME Group.

Risk Disclosure

WHEN INVESTING IN THE PURCHASING OF OPTIONS, YOU MAY LOSE ALL OF THE MONEY YOU INVESTED.

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