Long put is strategy oriented on downturn. Investor buys a put option with hope that price will fall. That would increase value of the option. Investor plans to hold the asset long. Sometimes long put is used to hedge long stock position.
The long put option can be held until it expires, which forces investor to buy stock at the market price, or can be sold short before expiration.
Long put has limited risk, therefore it is preferred by bears. Other method of achieving similar effect is shorting stock, but that strategy can be associated with high risk level. Moreover, options are more liquid than stocks, which allows investors to sell them quickly.
The stock price can fall even to almost zero. Therefore, the maximum profit in long put is limited to striking price of bought put take away option price.
- Christoffersen, P., Goyenko, R., Jacobs, K., & Karoui, M. (2017). Illiquidity premia in the equity options market. The Review of Financial Studies, 31(3), 811-851.
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