Options Trading Strategies: Long Put
Buying a put option gives you the right, but not the obligation, to sell the underlying asset at the strike price on expiration.
When to use this strategy?
When you are buying put options, you are expecting that the price of the underlying security will (significantly) fall. Also, you can buy a put if you want to hedge your long position on BTC/ETH (this strategy is called protective put), or if you want to short an underlying security with less risk.
Below is a Profit and Loss chart example of a long put options strategy:
Pros:
Buying a put option has more advantage in comparison to short selling the underlying security (BTC/ETH) as the risk is limited to the premium paid for the put option regardless of the spot price on the expiration date. Also, long puts have an unlimited profit potential.
Cons:
The disadvantage is that if the price goes against your speculation, you are losing the money you have paid for the put option. However, buying too many puts is increasing your risk if they expire worthless.
Example:
In this example, BTC is trading at 42,365.58 USD, and you expect its price to fall. You have bought a put with a strike price of 43,000.00 USD, with an expiration date of February 11th 2022, and for a premium of 1,428.85USD.
The Profit and Loss chart is given below:
Upon expiration:
If the spot price is below the break even price, you have made (potentially unlimited) profit.
If the spot price exceeds the break even point, at that point you are starting to make losses.
| BTC at Expiry (USD) | Payoff (USD) |
|---|---|
| 39,653.00 | +1,919.15 |
| 40,154.00 | +1,1417.15 |
| 40,583.00 | +988.15 |
| 58,372.00 | -160.29 |
| 41,571.15 (break even) | 0 |
| 41,784.00 | -212.85 |
| 42,138.00 | -566.85 |
| 42,638.00 | -1,066.85 |
| 43,000.00 (strike price) | – 1,428.85 (max loss) |