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.

0 comments… add one

Leave a Comment

Related pages

advantages and disadvantages of financial statementelectronic clearing servicelaw of diminishing marginal utility examplesadvantages and disadvantages of capitalist economyaccumulated depreciation examplewhat is the difference between complementary and complimentaryadvantages and disadvantages of chequesadvantages of decentralized organizationdisadvantages of a bank loandisadvantages of market penetrationinterest rate subventiondefinition of a traditional economyhorizontal merger meaningmeaning of qipmateriality accounting conceptbenefits of jit inventorywhat is the difference between complementary and complimentaryadvantages and disadvantages of mixed economydisadvantages of student loansdefine current liabilitiesadvantages and disadvantages of capital asset pricing modeladvantages and disadvantages of owners capitallimitations of jitglobalization merits and demeritsadvantages and disadvantages of pricingexamples current liabilitiesadvantage and disadvantage of international tradebarter system examplescentrally planned economy advantagesadvantages of the payback methodsubstitution effect and income effect examplessubstitute goods definition economicscomparison between socialism and capitalismbill of discountingwhat is the difference between accounts receivable and accounts payabledisadvantages of venture capital financingdefinition centrally planned economyprepaid expense journal entrya study of non operating expenses of proprietary concernadvantages of the payback methodtypes of dividend policy theorythe advantages and disadvantages of capitalismoligopoly market examples in indiadifference between retail banking and commercial bankingjournal entry for salary paidcomplementary and substitute goodscost oriented pricing methodsnondurable goods examplesdifference between macro & micro economicsfull form of slr in bankinggst fullformadvantages of debenturesadvantages of evmwhat are the limitations of ratio analysiswhat are autocratic leadersdisadvantages of delegationthe advantages of globalisationquota and tariffmeaning of fund flowpure conglomerate mergerwhat is mixed economiesformula for profitability ratiodisadvantage of vertical integrationdvr stockcomplementary goods definition economicsjournal entry deferred revenuemonopolistic competition definition economicstypes of retail banksdefine nondurable goodwhat is privatization and commercializationwhat is the meaning of cagrproduct bundle pricing definitiontraditional economy definition examplewhat is free market economy advantages and disadvantagesdifference between direct cost and indirect cost with example