SIE: 4.1.1.3. Long Put

4.1.1.3.  Long Put

Suppose you think the price of an actively traded stock called Salmonella Seafoods is currently overpriced at $22 and is about to go into free fall. You could write a call, but you are pretty confident of the direction of the stock, and you want to earn more than the price of a premium of a short call. You see bigger profits on the horizon, so you purchase a put instead.

Puts and calls can be bought and sold at various strike prices with varying premiums. Of all the options to buy on Salmonella Seafoods, you decide to buy this one:

SLML Oct 20 put @ 1.50

You’ve bought the option, so you are long the put. The underlying security is Salmonella (SLML). The expiration month is October. The exercise or strike price is $20. The premium is $1.50.

A long put is the opposite of a long call. With a long call, you profit when the price of the underlying security goes up. With a long put, you profit when the underlying price goes down.

Unlike a call, with a put, your breakeven point is the difference between the strike price and the premium, not the sum. As the price falls, you recoup your