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Option Strategies Details

Setup

Buy a Put

Typical Application

1. Speculate on a large, volatile price decrease

Volatility forecast

Up

Price forecast

Down

Breakeven

Strike Price minus Premium (debit) paid

PnL Equivalent

Protective Call

Max contract loss

Cost of the Put

Max position loss

same as Max Contract Loss

Long Put

Level: Beginner
1 Leg
Debit
Beginner
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You buy (long) a Put

Description

A trader who wants to speculate on a large, fast, and volatile price decrease can buy a Put. The trader pays a debit, called a premium, to buy the Put and has the right (but not the obligation) to sell 100 shares at the strike price.

Suppose stock XYZ is trading at $150. You forecast a large, fast decrease in XYZ price and you also forecast an increase in XYZ volatility.

You buy a $145 Put for $3 to express this view. Your breakeven XYZ price at expiry is $145 (strike price) - $3 (premium paid) = $142, but since the time component of your trade plan may not extend all the way to expiration you should be prepared to sell to close at a variety of XYZ prices as the market value of your $145 Put changes.