Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.
The simplest options strategies include purchasing calls or puts — typically called “going long.” For the bearish investor who believes an asset will see price declines over a well-defined period of time, the simplest strategy may be to purchase puts on those assets, also known as a long put strategy.
This strategy allows buyers to benefit from downward price moves while limiting losses to the premium paid upfront. Take a closer look at how long puts work, including their profit and loss potential, breakeven pricing, and how they differ from short puts or other bearish positions.
Key Points
• A long put is a bearish options strategy where the buyer gains the right to sell the underlying asset at a set price within a specific timeframe.
• The maximum loss for a long put is limited to the premium paid for the contract.
• Maximum profit is realized if the underlying asset’s price falls to zero, minus the premium paid.
• The breakeven point is calculated by subtracting the put option’s premium from its strike price.
• Long puts can be used for speculation, hedging existing positions, or as part of multi-leg options strategies.
What Is a Long Put?
The term “long put” describes the strategy of buying put options. The investor who purchases a put has purchased the right to sell an underlying security at a specific price over a specific time period. Being the buyer and holder of any options makes you “long” that option contract.
Because the contract in question is a put, the investor is long the put and expects the put option’s value to increase as the underlying asset declines. The put option holder is bearish vs. bullish on the underlying asset as they expect its price to go down.
Conversely, an investor who sells a put option would hold a short position, which they might do if they expect the price of the underlying asset to rise or remain neutral, instead of fall. (Note that investors can buy call and put options on SoFi’s options trading platform, but they may not sell options at this time.)
Maximum Loss
In comparison to other options trading strategies, long puts are low risk due to their limited and well-defined downside. The maximum amount an investor can lose is the premium paid at the initiation of the transaction.
Maximum Loss = Premium Paid
Because different options trading platforms have different commission structures (some of which may be commission-free), commissions are typically omitted from profit and loss calculations.
Maximum Profit
The maximum gain for a long put strategy occurs when the underlying asset drops to zero. While this potential gain is also limited and defined, it may exceed the potential downside and could be significant. The maximum gain on a long put strategy is defined as the strike price of the put less the premium paid.
Maximum Profit = Strike Price – Premium Paid
Breakeven Price
The breakeven price on a long put strategy occurs at the strike price less the premium. Note that the formula for the maximum gain and the breakeven price is the same but the metrics represent different outcomes.
The breakeven price is the point at which the investor begins to make a profit. As the price drops past breakeven toward zero, hopefully, the investor can realize the maximum gain possible.
Breakeven Price = Strike Price – Premium Paid
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Why Investors Use Long Puts
Investors utilize a long put strategy for three main reasons:
• Speculation: The investor identifies an asset they believe will decrease in price over a defined time period. Buying a long put allows the investor to profit from this forecasted price decrease if it happens.
• Hedging: Sometimes an investor already holds an asset like a stock or exchange-traded fund (ETF), and could be concerned that the price of the asset may drop in the short term, but still wants to hold the asset for the long term.
By purchasing a long put, the investor can offset any short-term losses through gains on the put and keep control of the underlying asset. For most assets, this strategy may serve as relatively low-cost downside protection.
• Combination strategies: For experienced investors, long puts can be part of complicated multi-leg strategies involving the sale or purchase of other options, both calls and puts, to pursue different investment objectives.
Long Put vs Short Put
In contrast to a long put, a short put options strategy occurs when the investor sells a put. The seller of a put options contract is obligated to buy shares in the underlying security from the option holder at the strike price if the option is exercised.
Short put strategies differ from long puts in structure, obligation, and market outlook:
| Long Puts | Short Puts | |
|---|---|---|
| Investor role | Buyer | Seller |
| Investor responsibility | Right/Discretion | Obligation |
| Investor outlook — Asset | Bearish | Neutral to Bullish |
| Risk | Premium | (Strike Price – Premium) |
| Reward | (Strike Price – Premium) | Premium |
Long Put Option Example
An investor has been watching XYZ stock, which is trading at $100 per share. The investor believes the $100 share price for XYZ is excessive and believes the share price will fall over the next 30 days.
The investor purchases a long put with a strike price of $95 per share for a premium of $5 and an expiration date of 60 days from today. Because options contracts are sold based on 100 share lots, the price for this contract will be $5 x 100 = $500.
The options contract gives the investor the right to sell 100 shares of XYZ at $95 for the next 60 days.
The breakeven price on this investment is:
Breakeven Price = Strike Price – Premium Paid
Breakeven Price = $95 – $5 = $90
Should XYZ be trading below $90 at expiration, the option trade will be profitable.
If XYZ stock falls to $0 at expiration, the investor could realize their maximum possible profit:
Maximum Profit = Strike Price – Premium Paid
Maximum Profit = $95 – $5 = $90 profit per share or $9,000 per put option
However, if XYZ stock stays above $90 at expiration, the investor would incur their maximum possible loss, and the option will expire worthless:
Maximum Loss = Premium Paid
Maximum Loss = $5 per share or $500 per put option
Even if XYZ rose above the $100 price at purchase, the investor’s loss remains limited to the premium paid, or $500 in this example.
The Takeaway
Long put options provide a potentially accessible starting point for those exploring bearish strategies. The trading strategy may provide limited downside risk and potential profit if the underlying asset declines.
Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.
Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.
FAQ
What is the long put option strategy?
A long put strategy involves buying a put option in anticipation that the underlying asset will decline in value. The buyer gains the right — but not the obligation — to sell the asset at a predetermined strike price before the option expires. This strategy can be used to profit from a downward move or to hedge an existing long position. The risk is limited to the premium paid, while potential profit increases as the asset’s price drops.
What is the most successful options trading strategy?
There is no single “most successful” options strategy — success depends on the trader’s goals, risk tolerance, and market outlook. For bearish views, long puts or bear spreads may be appropriate. For bullish views, strategies like covered calls or long calls are commonly used. More advanced traders may use iron condors or straddles for neutral markets. Each strategy carries trade-offs in terms of cost, complexity, and risk-reward profile. No strategy guarantees returns.
How can traders make money on long puts?
To profit from a long put, the price of the underlying asset must fall below the breakeven point, which is the strike price minus the premium paid. As the asset’s price drops, the value of the put typically increases, which may allow the trader to sell the option at a profit or exercise the option to sell the asset at a higher strike price. The lower the asset falls, the greater the potential profit — up to the maximum if the asset drops to zero.
When should an investor consider a long put?
An investor might consider a long put when they expect the price of an asset to decline within a defined time period. This strategy allows them to potentially profit from the downside move while limiting their maximum loss to the premium paid. Long puts can also serve as a form of short-term insurance for a long position in the stock, especially in volatile or uncertain markets. However, because options lose value over time, long puts are generally best suited for situations where a significant price move is expected before expiration.
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Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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