TOOLS OF THE TRADE

THE LONG PUT

Graph courtesy of the options industry council 

The long put optimizes a bearish trend.  You can use this bearish instrument as a standalone strategy to take advantage of a falling stock or you can add it to a stock that you currently own to protect the value of that stock.  The aforementioned application of the put is known as a “Protective Put”.  The same position but with a bullish expectation is called a “Married Put”.  The “Married Put” is used when the trader is primarily bullish on the stock yet wants to hedge the downside in case of an unexpected drop.

There are also a number of spreads and combination plays using the long put which we will cover in future articles.  As is so with the long call from last week, the trader’s risk is limited to the cost of the option.  In the case of the long put, its’ value increases as the value of the underlying decreases.  The amount of the movement of the option in relation to the stock movement is represented by the ”Delta”, which in part is related to the positioning of the long put either ITM, ATM or OTM.  The proximity to expiration as opposed to long dated options also has an effect on the delta.  We will get into more details on the Delta as well as other “Greeks” in future sessions. 

Study the graph to get a firm grasp on the risk/reward of the position.  This tool would have saved many accounts this year had the strategy been used to hedge the recent bear market.  Next week, we will investigate the “Short Call”.  Best, Robin

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