Long Put Option: What It Is and Factors to Consider Before Initiating It

The go-to strategy for traders who expect the market to move downward is the Long Put. Just like a Long Call is suited for bullish views, a Long Put aligns with a bearish outlook. This strategy is also widely used by hedgers looking to protect their portfolios against downside risk. 
Buying Puts can be an efficient way to take short-term positions during expected market corrections, especially since market declines often occur rapidly. 
Compared to short selling equities, which can expose a trader to unlimited risk, a long put trade offers the advantage of limited loss. 
Let’s explore what makes a long put a strategic choice during bearish phases. 

Long Put trade 

A long put trade involves buying a put option with the expectation that the price of the underlying asset will fall. 
The position becomes profitable if the market declines. If the price stays flat or rises, the trade may incur a loss. 

Basics – What is a Put Option? 

A Long Put provides the buyer with the right (not obligation) to sell the underlying stock at a predetermined strike price on or before expiry. 
As market prices fall, the value of the Put option tends to rise. 
The buyer pays a premium to acquire this right and can exit the position at any time, either by selling it in the market or letting it expire. 

Before initiating a long put trade, three core aspects must be considered: 

• Strike Price – The agreed price at which the underlying asset can be sold 

• Expiration Date – The last date to exercise the option 

• Premium Paid – The upfront cost to acquire the option 

Payoff diagram of a Put Option 

Let’s take an example: 
Suppose Nifty is trading at 17,759, and a trader buys a 17,850 Put option for the September 29, 2022 expiry. 
The premium paid is ₹333.75, resulting in a total investment of ₹16,687.50 (₹333.75 × 50 lot size). 

• Maximum Loss = ₹16,687.50 

• Breakeven Point = 17,850 – 333.75 = ₹17,516.25 

This trade becomes profitable only if the index moves below ₹17,516.25.

When to initiate a Long Put trade? 

Traders initiate Long Put positions when they expect a sharp market correction or sustained bearish trend. 
Since fear often triggers faster market reactions than greed, downturns are generally steep and quick, making the Long Put a popular strategy. 

Although option sellers have a higher probability of success due to time decay, Long Put trades can be highly effective in specific scenarios: 

• Intraday or short-term trades where time decay is limited 

• BTST trades (Buy Today Sell Tomorrow), when traders want to capitalize on overnight sentiment 

• Scalping or momentum trades aiming for quick profits 

• Low volatility environments, identified using IVR or IVP metrics, where a spike in volatility is anticipated 

Professional traders prefer deploying long put trades when volatility is unusually low, expecting both direction and volatility to favor their position. 

Which Put Option to buy? 

Long Put strategies can be built using any available strike price. However, many retail traders make the mistake of buying Deep OTM Puts just because they appear cheap. 

For such options to turn profitable, the market must move drastically in a short span. 
Unless you’re expecting a major market event, it’s more effective to select: 

• ATM (At-the-Money) 

• Slightly ITM (In-the-Money) 

• Slightly OTM (Out-of-the-Money) 

This improves the probability of achieving breakeven and generating returns. 

Factors to consider in selecting the Put option strike price 

Impact of underlying price change 

While it’s expected that the put’s value should rise as the market falls, the degree of movement depends on the option’s Delta.
For instance, if Delta = 0.20, then for every 100-point fall in the underlying, the option price may increase by around 20 points. 

Choose a strike based on how far you expect the market to move, and what Delta exposure aligns with your risk-return goal. 

Impact of volatility 

Volatility is a friend to option buyers. When IV is low and expected to rise, buying a Put can result in double benefit price move + premium expansion. 
Traders often enter Long Put trades when volatility is near its lowest level. 

Impact of time 

Time decay, or Theta, works against the buyer. 
The longer the position is open without price movement, the more value is lost. 
Thus, Long Put positions should ideally be created when expecting a quick, decisive market drop. Even if the trade is directionally correct, a delay can eat into profits or lead to loss. 

Things to remember 

• A Long Put represents a bearish stance and is commonly used for both speculation and hedging. 

• It allows the buyer to sell the underlying asset at the strike price before expiry, regardless of the current market level. 

• Compared to short-selling stocks, buying Puts involves limited risk (the premium paid.) 

• Traders must always assess the Strike Price, Expiry Date, and Premium Paid before placing the trade. 

• The strategy is preferred by short-term traders like scalpers and momentum players, and also by professionals looking to take advantage of low implied volatility. 

• Remember: Volatility helps, but time decay hurts, so timing matters.