Long Put Options: Definition, Examples, and Comparison With Shorting Stock

What is a long put?

A long put is an options strategy where an investor buys a put option, giving the buyer the right (but not the obligation) to sell the underlying asset at a specified strike price before or at expiration. Investors use long puts to speculate on a decline in the asset’s price or to hedge an existing long stock position. Risk is limited to the premium paid for the option.

How long puts work

• Strike price: the price at which the option holder can sell the underlying asset.
• Exercise: American-style puts can be exercised any time before expiration; European-style puts only at expiration. Most traders sell the option rather than exercise it.
• Profit/loss profile:
• Maximum loss = premium paid (plus fees).
• Break-even at expiration = strike price − premium paid (per share).
• Maximum profit occurs if the underlying falls to zero; per-share maximum profit = strike − premium.
• Liquidity and time: Options lose value over time (time decay), and implied volatility affects option prices.

Example — basic mechanics

If you buy a put with a $50 strike:
* If the stock falls to $20, you can sell at $50 (or sell the increased-value option) and realize a gain.
* If the stock rises above $50 by expiration, the put expires worthless and you lose only the premium.

Comparison with shorting stock

Key differences:
* Risk: Shorting stock has theoretically unlimited loss potential (price can rise indefinitely). A long put limits loss to the premium paid.
* Profit potential: Both strategies are capped because a stock can only fall to zero. A long put’s maximum profit equals the strike minus the premium; a short stock’s maximum profit equals the initial sale price (if the stock goes to zero).
* Capital and margin: Short selling typically requires margin and has borrowing costs; buying puts requires only the premium up front.
* Time sensitivity: A put option has time decay—its value erodes as expiration approaches—whereas a short stock position does not have time decay but may incur borrowing and margin interest.
* Assignment and mechanics: Exercising a put can result in being short the underlying (if exercised while holding the option), whereas a short sale directly puts you short from the start.

Using long puts for hedging (protective put)

A protective put (or married put) is buying puts while holding the underlying stock to cap downside losses.

Hedging example (protective put)
* Position: 100 shares of Bank of America (BAC) purchased at $25 per share.
* Hedge: Buy one put with a $20 strike costing $0.10 per share (one contract = 100 shares → $10 premium).
* Result: If BAC falls below $20, you can sell at $20, so stock losses are limited to $5 per share × 100 = $500, plus the $10 premium → total max loss = $510. Losses below $20 are protected by the put.

Real-world example

Apple (AAPL) example:
* AAPL trading at $170. You buy 10 put contracts (1,000 shares) with a $155 strike, paying $0.45 per share → total cost = $450.
* If AAPL falls to $154 before expiration:
* Option intrinsic value = $1.00 per share → position value = $1,000.
* Profit = $1,000 − $450 = $550 → ~122% return.
* If AAPL rises to $200, the puts expire worthless and you lose the $450 premium.
* Break-even per share = strike − premium = $155 − $0.45 = $154.55.

Pros and cons of long puts

Pros:
* Limited, known downside (premium paid).
* Leverage: large percentage gains possible for relatively small premium outlays.
* Useful hedging tool to cap losses on long stock positions.
* No margin interest or borrowing requirement as with shorting.

Cons:
* Premium can be lost if the underlying doesn’t move below break-even by expiration.
* Time decay and implied volatility can erode option value.
* Options may have less liquidity and wider bid-ask spreads than the underlying stock.
* Requires correct timing in addition to correct directional view.

Conclusion

Long puts are an effective way to express a bearish view or to protect long stock holdings with a clearly defined and limited downside (the premium). They are often preferable to shorting for investors who want capped losses and lower upfront capital requirements, but they involve time sensitivity and costs that must be managed.