Long Put Meaning

Long put is a strategy used in derivatives markets in order to earn profits from fall in the price of underlying stock or index. In stock markets context going long means buying a security and when we buy stock we hope that price of stock will rise so that we can earn profit but in case of long put it is different in the sense that when an individual is long put he or she will make profit when price of stock falls and will lose when the price of stock rise.

It can be better understood with the help of an example, suppose the stock price of IBM is quoting at $400 in the spot market, now an investor or trader feels that the price will go down in near future and since trader does not have any stock with him or her so that he or she can sell that stock now to buy it later, trader will buy put option of IBM because when one buy put option he or she will make profits when the price of underlying goes down. Suppose the put option of $390 dollar is quoting at $10 then trader who is long put will benefit only when the price of IBM falls below $380 and if the price of IBM does not fall below $380 then trader will lose $10 as the price of put option will become zero on expiry of option.

The biggest advantage of long put is that individual buying put has limited risk as he or she will lose only the premium paid for buying put option whereas profit potential is very high and hence buying long put is far better than shorting stock in futures because in case of short position in futures loss is unlimited and hence it very risky when one compares long put with futures short positions.

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