LONG PUT
Buying a Put is the opposite of buying a Call.
When you buy a Call you are bullish about the stock / index. When an investor
is bearish, he can buy a Put option. A Put Option gives the buyer of the Put a
right to sell the stock (to the Put seller) at a pre-specified price and
thereby limit his risk.
A long Put is a Bearish strategy. To take
advantage of a falling market an investor can buy Put options.
When to use:
Investor
is bearish about the stock / index.
Risk: Limited
to the amount of Premium paid. (Maximum loss if stock / index expires at
or above the option strike price).
Reward: Unlimited
Break-even Point:
Stock Price - Premium
Example:
Mr. XYZ is bearish on Nifty on 24th June, when the Nifty is at 2694. He buys a Put option with a strike
price Rs. 2600 at a premium of Rs. 52, expiring on 31st July. If the Nifty goes below 2548, Mr. XYZ will make a profit on
exercising the option. In case the Nifty rises above 2600, he can forego the
option (it will expire worthless) with a maximum loss of the premium.
Strategy
: Buy Put Option
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Current Nifty index
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2694
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Put Option
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Strike Price (Rs.)
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2600
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Mr. XYZ Pays
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Premium (Rs.)
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52
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Break Even Point (Rs.)
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2548
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(Strike Price - Premium)
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The payoff schedule
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The payoff chart (Long Put)
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On expiry Nifty
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Net Payoff from
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closes at
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Put Option (Rs.)
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2300
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248
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2400
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148
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2500
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48
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2548
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0
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2600
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-52
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2700
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-52
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2800
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-52
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2900
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-52
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ANALYSIS: A
bearish investor can profit from declining stock price by buying Puts. He limits
his risk to the amount of premium paid but his profit potential remains
unlimited. This is one of the widely used strategy when an investor is bearish.
