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LONG PUT

Core Concept: Buying a put option gives the right to profit from stock price decreases with limited downside.

Why It Matters​

Puts provide leveraged downside exposure or portfolio insurance. More complex than calls due to volatility behavior (puts gain IV in crashes).

When to Use​

✅ Use long puts when:

  • Bearish on stock, want leverage
  • Portfolio hedging (protective puts)
  • Anticipating market correction
  • Less capital than shorting stock

❌ Avoid when:

  • IV already elevated from fear (expensive)
  • < 30 days to expiration (theta burn)
  • Small expected down move
  • Could use put spreads instead (cheaper)

Strategy Mechanics​

Setup: Buy put at strike ≥ 5% below current price
Max profit: Strike - premium (limited by stock going to $0)
Max loss: Premium paid
Breakeven: Strike - premium paid

Ideal conditions: Falling stock, rising IV (fear), sufficient time

Trade-offs​

Pros: Capped risk, leveraged downside, portfolio insurance, benefits from volatility spikes
Cons: Time decay, expensive during high IV, need correct timing + magnitude

Long puts mirror long_call but benefit from implied_volatility spikes during sell-offs.

Quick Reference​

Position Greeks:

  • Delta: -0.30 to -0.70 (negative = profit from drops)
  • Gamma: Positive (accelerates in your favor)
  • Theta: Negative (daily decay)
  • Vega: Positive (gains from volatility spike)

Strike selection:

  • ATM puts: Balanced cost/protection
  • OTM puts: Cheaper, crash insurance
  • ITM puts: Expensive, higher delta

Timing considerations:

  • Buy puts when VIX < 20 (cheaper)
  • Avoid buying after 5%+ drop (IV already spiked)
  • Use 60-90 DTE for breathing room

Puts vs shorting stock:

MetricLong PutShort Stock
Max lossPremiumUnlimited
MarginNoYes ($25k+)
IV benefitYesNo
Time decayYes (bad)No

Examples​

EXAMPLE

Successful long put:

Stock: $150
Buy: 145 Put, 60 DTE, premium = $4.00
Cost: $400
Breakeven: $141

Stock drops to $130:

  • Put now worth $16.00 (ITM + time value)
  • Profit: $1,200 (300% gain)
  • Stock loss: 13.3% vs put gain: 300%

Protective put hedge:

Portfolio: $50,000 in SPY at $450 Buy: 440 Put (2% OTM), 60 DTE, premium = $5.00

Insurance cost: $500 (1% of portfolio)

Market crashes to $400 (-11%):

  • Portfolio loss: $5,500
  • Put profit: ~$4,000 (440 - 400 - 5)
  • Net loss: $1,500 (3% vs 11% unhedged)

Insurance cost worth it for sleep at night.

Volatility spike benefit:

Normal market:

  • VIX: 15, SPY: $450
  • 440 Put, 30 DTE: $3.00

Market correction:

  • VIX spikes to 35, SPY: $445 (only -1%)
  • Put now worth $8.00 (167% gain)
  • IV expansion outweighed small stock drop

Puts uniquely benefit from fear even without large moves.

Time decay vs directional gain:

Buy: $100 Put on $105 stock, 45 DTE, $3.00 premium

Day 30: Stock at $100 (your target)

  • Put worth $2.00 (33% loss despite being right)
  • Intrinsic: $0, Extrinsic decayed from $3 to $2

Lesson: Need stock to move BEYOND breakeven ($97) to profit.

Put spread alternative:

Instead of: Buy 100 Put for $5.00 (cost $500)

Alternative: Buy 100 Put, Sell 90 Put for net $2.50

  • Cost: $250 (50% cheaper)
  • Max profit: $750 (vs unlimited for long put)
  • Breakeven: $97.50 (vs $95)

Spreads trade max profit for lower cost and better breakeven. ```

References​