In Chapter 7, we discussed that buying a call is probably the most basic option strategy and the easiest to learn for a beginner. Buying a put option has many of the same characteristics as buying a call option, except a put option profits in the opposite direction. Most individuals are familiar with buying and profiting from an increase in the value of an underlying stock, but a put option makes it equally as easy to profit from a decline in a stock. This chapter provides an overview of a long put, presents numerous comprehensive examples, and then moves to beyond the basics, including a discussion of rolling, protective and married puts, and equivalent positions.
A long put involves the purchase of a put option and is a bearish strategy. An advantage of a long put is that if the stock declines, you have unlimited potential with limited risk. A long put typically increases in value from a decline in the underlying stock or volatility expansion and declines in value from a rise in the underlying stock, time decay, or volatility contraction. Following is a summary profile of a long call:
Profit potential: Unlimited. (Technically, strike price minus premium paid.)
Risk: Limited to premium paid.
Time decay: Negative (theta).
Volatility: Increase is positive (positive theta), decrease is negative.
Theta (time): Negative.
Vega (volatility): Positive.
Breakeven: Stock at strike price minus premium paid. ...