Strategy guide
Long Put Strategy
A long put buys the right to sell 100 shares at the strike before expiration, for a premium.
Strategy summary
- Market outlook
- strong bearish
- Risk type
- defined
- Capital requirement
- Premium × 100 per contract
- Maximum profit
- Strike minus premium, if the stock falls to zero
- Maximum loss
- Premium paid
- Theta / vega
- negative / positive
- Assignment risk
- low
- Typical use
- Directional downside or portfolio hedging
Payoff at expiration
- Max profit$9,650.00
- Max loss-$350.00
- Breakeven$96.50
How Long put works
It is one of the few positions that profits from a decline with loss limited to the premium, which makes it a common hedge.
Exact option legs
Buy 1 put
- BUY 1 × $100.00 put expiring 2026-01-16 at $3.50
Payoff, breakeven and risk
At expiration the position is worth the intrinsic value of each leg. The maximum profit is $9,650.00, the maximum loss is -$350.00, and the position breaks even at $96.50.
Worked example
With the underlying at $100.00:
- The put costs $350 and breaks even at $96.50 at expiration.
- Maximum loss is the $350 premium; maximum gain is $9,650 if the stock falls to zero.
- A move to 90 is worth $1,000 intrinsic, a $650 gain.
Strike selection
At-the-money puts balance cost and protection; out-of-the-money puts are cheaper but only help beyond a larger decline.
Expiration selection
Hedges need enough time to cover the risk window, but longer puts cost more. Match expiration to how long you need the protection.
Effect of time decay
This structure is negative on theta: net time decay works against it.
Effect of implied volatility
It is positive on vega: rising implied volatility helps.
Effect of stock movement
The position suits a strong bearish view, and it is tested most when the underlying moves outside the modelled strikes.
Assignment considerations
Assignment risk is low. Short legs can be assigned, especially when they are in the money or before a dividend; long legs have no obligation but can be exercised.
When it works poorly
- Rising markets where the put simply decays.
- Low implied volatility that makes the hedge cheap but the move small.
- Very short expirations that leave no time for the thesis.
Common mistakes
- Buying a hedge you cannot afford to renew through a long decline.
- Choosing a strike so far out of the money it never pays.
- Treating a hedge as a profit center rather than insurance.
Tax caveat
Option outcomes can receive different tax treatment from share trades, and assignment changes the holding period and cost basis. This is general information, not tax advice; confirm your situation with a qualified professional.
FAQ
- What is the maximum loss on a long put?
- The premium paid.
- How do puts hedge a portfolio?
- They gain value as the underlying falls, offsetting losses on the shares.
- Why do puts decay?
- Options lose extrinsic value as expiration approaches when the underlying does not move.
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Delta estimates how much an option's price changes for a one-dollar move in the underlying, and is often used as a rough probability proxy.
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Theta estimates how much value an option loses per day from the passage of time, all else equal.
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