Long Put vs Short Put – Option Trading Strategies

Cole Turner

Option Premium

The long put and short put are option strategies that simply mean to buy or sell a put option.

If an investor wants to profit from an increase or decrease in a stock’s price, then buying or selling a put option is a great way to do that. This article will prepare investors to effectively use the long put and short put strategies to generate a profit.

A put option is a contract between a buyer, who is known as the option holder, and a seller, who is known as the option writer. This contract gives the holder the right, but not the obligation, to sell shares of an underlying security at a set price. The set price in an option contract is known as the strike price.

Put option contracts have expiration dates. Option contracts must be exercised before or on the expiration date, or the option will expire as worthless.

If an investor were to execute the long put strategy, then he would buy a put option and assume the role of the option holder. A long put strategy would be used if an investor expected the stock’s price to decrease.

If an investor were to execute the short put strategy, then he would sell a put option and assume the role of the option writer. A short put strategy would be used if an investor expected the stock’s price to increase.

Let’s look at examples of the long put and short put strategies.

  • Long Put Strategy: Assume stock XYZ has a price per share of $100. An investor buys one call option for XYZ with a strike price of $95 expiring in one month. He expects the stock price to fall below $95 in the next month.
Exclusive  What it Means to Exercise an Option?

As the holder of the option, he has the right to sell 100 shares of XYZ at a price of $95 until the expiration date. One option contract is equal to 100 shares of the underlying stock.

Let’s assume the premium for the put option costs $3 per share. Therefore, the holder pays $300 for the put option to the option writer. This amount is the maximum amount the holder can lose.

Assume the price of XYZ falls to $90 in that month. Now, the holder can exercise the put option and sell 100 shares of stock at $95, rather than $90. The holder can buy the shares of stock at the market price of $90, then immediately sell the shares at $95. This generates a profit of $5 per share for the holder.

However, if the share price never falls below the strike price of $95, then the put option expires, and the holder is at a loss of $300 because of the premium.

  • Short Put Strategy: Assume stock XYZ has a price per share of $100. An investor sells one put option with a strike price of $98 that expires in a month. The investor expects the price of XYZ to increase within the next month.

For writing the put option, the investor receives a premium of $3 per share, or a total of $300.

Assume that within the month, stock XYZ never closes below $98. The option expires as worthless. The option writer profits $300 because of the premium.

However, let’s assume the share price did fall to $95 within the month. In this case, the option would have been exercised and the option writer would be obligated to buy the shares of stock at $98 rather than $95. That comes out to be a loss of $3 per share for the option writer.

Exclusive  LEAPS Options – What are they?

The long put and short put strategies can be used when an investor expects the price of an underlying stock to either increase or decrease. After reading this article, investors should feel prepared to generate a profit from buying and selling put options.

Like This Article?
Now Get Mark's FREE Special Report:
3 Dividend Plays with Sky-High Returns

This newly-released report by a top-20 living economist details three investments that are your best bets for income and appreciation for the rest of the year and beyond.

Get Access to the Report, 100% FREE


img
previous article

The long call and short call are option strategies that simply mean to buy or sell a call option. Whether an investor buys or sells a call option, these strategies provide a great way to profit from a move in an underlying security’s price. This article will explain how to use the long call and short call strategies to generate a profit. A call option is a contract between a buyer, who is known a

PREMIUM SERVICES FOR INVESTORS

Dr. Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen is a professional economist, investment expert, university professor, and author of more than 25 books.

Product Details

LEARN MORE HERE

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

Product Details

LEARN MORE HERE

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker,
financial journalist, and money manager. As well as a book author and regular contributor to
numerous investment websites, Jim is the editor of:

Product Details

LEARN MORE HERE

Bob Carlson

Bob Carlson provides independent, objective research covering all the financial issues of retirement and retirement planning. In addition, Bob serves as Chairman of the Board of Trustees of the Fairfax County (VA) Employees’ Retirement System, which has over $2.8 billion in assets.

Product Details

LEARN MORE HERE

Mike Turner

Mike Turner’s financial, mathematical, computer science and engineering background serves as the foundation for his disciplined, rules-based approach to trading. Mike’s three services include:

Product Details

LEARN MORE HERE

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street. Since 2010, Hilary's financial publications have provided stock analysis and investment advice to her subscribers:

Product Details

LEARN MORE HERE

DividendInvestor.com

Used by financial advisors and individual investors all over the world, DividendInvestor.com is the premier provider and one-stop shop for dividend information and research.

Product Details

Popular tools include our proprietary Dividend Calendar, Dividend Calculator, Dividend Score Card, and many more.

LEARN MORE HERE