Long Put

Hello everyone! Today, we continue to introduce a basic options strategy: Long Put.

I. Strategy overview

1)  Strategy composition

Most investors follow the classic strategy of trying to buy low and selling high to make a profit. However, some strategies allow you to potentially profit when an asset's value goes down, and one of the most common option strategies is buying a put option.

The price of the put usually rises when the stock price falls, potentially leading to profits.

2)  Profit and loss analysis

3) Strategy Characteristics

Limited Profit: The maximum theoretical profit is the strike price minus the premium since a stock's price cannot be lower than zero.

Limited Loss: If the stock price does not fall below the strike price on the expiration date, the put option will expire worthless, with the maximum loss being the initial premium paid.

Option Buyer Strategy: The Long Put strategy is an option buyer strategy, which means that you pay a premium when opening the position.

II. Case Study

A put option is a contract that gives the buyer the right to sell an asset at a predetermined price before the contract expires.

Let's explore how a put option is formed through an example:

Assume on September 24, 2024, someone offers you the opportunity to sell 100 shares of Tesla (TSLA) at $200 per share any day before or on January 17, 2025, for a payment of $9 per share.

If you think Tesla is overvalued and that its price could drop to $180 per share or lower, you might find this opportunity appealing. This is where a put option contract comes into play.

Option Buyer (Right Holder):Pays $900 ($9*100) for the right to sell 100 shares of Tesla at $200 per share any day before or on January 17, 2025. You may exercise this right or not.

Option Writer (Obligated Party):Receives the $900 payment and must fulfill the obligation to buy 100 shares of Tesla at $200 per share any day before or on January 17, 2025, if the buyer exercises the contract.

1) Contract elements

Using Tesla's put option as an example, let's review the key elements of an options contract.

Underlying Asset: Tesla stock

Premium: $9

Direction: Bearish (Long Put)

Strike Price: $200

Expiration Date: January 17, 2025

Contract Multiplier: For U.S. options, it's usually 100 shares per contract. However, in the Hong Kong market, stock options don't follow a fixed correlation and should be carefully monitored during trading.

2) Profit and loss analysis

Assume you bought this put option on September 24, 2024, at the closing price:

The opening cost: $9*100 = $900 to buy one TSLA put.

Scenario 1: Stock price < put strike price -premium

Suppose Tesla's stock price falls to $180 at expiration:

You would exercise the option, which means you can sell at the $200 strike price after paying a premium of $9 per share.

Profit per share is $200 (strike price) - $180 (stock price) - $9 (premium) = $11.

Your total profit would be $11*100 = $1,100.

If you don't hold the underlying asset, you will receive a short position in the underlying shares. If you immediately bought to close at the market price you could receive the profit described. Otherwise, you would hold a short position of 100 shares of TSLA with a paper gain.

Scenario 2: Strike price - premium< stock price < put strike price

Assume Tesla's stock price falls to $195 at expiration:

You would exercise the option. Your loss per share is $200 (strike price) - $195 (stock price) - $9 (premium) = -$4.

Your total loss would be $4*100 = $400.

If you don't hold the underlying asset, you will receive a short position in the underlying shares. If you immediately bought to close at the market price you could receive the loss described. Otherwise, you would hold a short position of 100 shares of TSLA with a paper loss.

Scenario 3: Stock price> put strike price

If Tesla's stock price remains above $200 at expiration, the option cannot be exercised, resulting in a loss of the entire premium of $9*100 = $900.

III. How to set up a long put

Access the Options Chain:

• Tap on a stock > Options > Chain

View Options:

• By default, options for the nearest expiration date are displayed. Click Put to view all put options.

• Slide the date bar to switch between different expiration dates. Weekly options are marked with a "w", while unmarked ones are monthly.

Understanding the Display:

• The blue area represents in-the-money options; the white area represents out-of-the-money options. The dividing line shows the current price of the underlying stock.

Analyzing Options:

• Click on an option to see a quick trade bar at the bottom. Click the upward arrow to view the theoretical profit and loss analysis chart.

• Swipe left and right on the chart to see how different price points affect your projected return. It also shows estimated profit probability and breakeven points.

• Double-click on an option to enter the specific quotes page for more details.

• To buy the put option, click Trade at the bottom left to proceed.

Trade an Option

• Enter Trading Interface > Set Trading Direction as "Buy" and Price > Number of Contracts > Order Type > Click Buy

• The options trading interface resembles that of stocks, with the direction set to Buy.

• Note: Options typically have a larger bid-ask spread so that you might choose a middle price based on the trading situation.

• To find purchased option contracts, go to Holdings >, and you can choose to sell to close / rollover / exercise a long option position.

IV. Applying the long put strategy

1）Leveraging small investments for potentially larger gains

Assume TUTU is a listed company you believe is overvalued and might decline soon. TUTU's current stock price is $50, and you believe it might drop to $40.

(Note: TUTU is not a real stock, it is used for illustrative purposes only.)

If you short the stock:

You need a margin account to short 100 shares at $50. If the price falls to $40, the profit is (50-40)*100 = $1,000. ROI: $1,000/$5,000 = 20%.

If you buy a put option:

Suppose you buy a put option with a $45 strike price expiring in three months, paying a $2 premium per share. Your total cost is $2*100 = $200.

If the price falls to $40 by expiration, the profit is (45-40-2)*100 = $300. ROI: $300/$200 = 150%. This illustrates the power of leverage.

Shorting stocks can lead to unlimited losses since there's no cap on how high a stock price can go. In contrast, a long put strategy limits your maximum loss to the premium paid for the option.

However, time also plays a role in options. If TUTU's stock fluctuates or rises within three months before reaching the target price, a short position can still profit, but a short-term expiration put would have expired worthless.

Therefore, this strategy is most effective when you are confident that a stock will decline within a certain timeframe.

(Maximum potential loss and profit for options are calculated based on the single leg or an entire multi-leg trade remaining intact until expiration with no options contracts being exercised or assigned.

These figures do not account for a portion of a multi-leg strategy being changed or removed or the trader assuming a short or long position in the underlying stock at or before expiration. Therefore, it is possible to lose more than the theoretical max loss of a strategy.)

2) Hedging downside risks

Imagine you've bought shares of a company and their value has skyrocketed. You're excited about your unrealized profits, but you have a slight concern about a potential price drop. Selling the shares would secure your profits, but you'd miss out on potential future gains if the stock price keeps rising.

You can buy an equivalent number of put options as your long position in the underlying stock for protection. If the stock drops below the strike price, the put can generate profits to offset your losses; if it rises, you benefit from the uptrend, with the premium paid for the long put serving as 'insurance'. However, if the put expires worthless and isn't exercised, it won't protect your position.

This strategy is known as "Protective Puts," commonly used by options traders and will be explained in more detail in future options guides.

V. FAQs

A. What's the difference between buying puts and calls?

Both strategies involve purchasing options, but they are fundamentally different in several aspects.

A put option with a strike price higher than the current stock price is considered in-the-money (ITM) and has intrinsic value (strike price - current stock price). If the strike price equals the current stock price, it is at-the-money (ATM), and if it's lower, it is out-of-the-money(OTM).

The time value of a put option also generally decreases until it reaches zero on the expiration date. Time value usually decreases faster when closer to expiration.

B. Will the price of a put option always increase when the stock price falls?Not necessarily. The underlying asset can move in both upward and downward directions, and puts are also influenced by implied volatility (IV). Increased volatility raises the likelihood of the stock price reaching the strike price, which could increase the option's price. Lower implied volatility in the underlying asset at the time the contract is purchased theoretically benefits the option buyer.

Before major events like earnings releases and Federal Reserve meetings, volatility tends to rise; after these events conclude, volatility usually drops quickly, which can depress option prices. When an IV crush occurs, you might see the underlying stock decline, but the increase in the put option you purchased may be less than expected, or in rare cases, the option price might even fall along with the stock.

Additionally, it's prudent to consider choosing options with high trading volume and liquidity to help avoid difficulties in selling at desired price levels, which might affect profitability.

C: What happens if I exercise a Long Put without holding the underlying stock?

If you exercise a Long Put without owning the underlying stock, your account may incur a short position, requiring margin. If margin requirements are not met, the position could be liquidated. Confirm with your broker to understand how these scenarios are handled in your account.

D. What happens if holding an ITM put option to expiration without holding the underlying stock?

If you hold a put option until expiration without owning the underlying stock, the system usually creates a short position for you. Moomoo will automatically liquidate the options upon expiration only in cases where the account meets margin requirements, and it is important to verify that this applies to your account. Liquidation is not guaranteed, and investors should monitor their positions closely.

For example, if you purchased a TUTU put option and did not hold the stock upon exercise, your account will show a short position of -100 shares of TUTU. This is known as "naked short," which carries theoretically unlimited potential loss and should be avoided by most investors.

You could sell the put option before expiration or roll the position and realize the profit or loss to adjust the exercise date. If assigned a short position after expiration, you can buy the corresponding number of shares to close the short position.

E. What can you do after buying put options?

Similar to call options, after buying put options, you can close the position, exercise the option, roll the position, or hold to expiration.

Closing the position: If the put option reaches your target profit, you can sell it to lock in gains. Conversely, if the market moves against you, selling may help you cut your losses. Your profit is calculated as: (Selling Premium - Buying Premium) × Contract Multiplier × Number of Contracts.

Exercising the option early: This typically occurs only when the stock price is below the strike price, but it's rare in practice because doing so sacrifices the option's time value.

Rolling the position: This involves selling your current put option to realize any profit or loss and then buying a new one for the same underlying stock. This strategy helps manage risk or enhance profit potential by adjusting the time frame and strike price. For example, if you hold a three-month put option but anticipate a significant price drop in six months, you can roll to a longer-term option. Conversely, if a catalyst is expected within a month, you might close your position and purchase a shorter-term put option.

Holding to expiration: If the option is out-of-the-money, it will expire worthless, resulting in a loss of the entire premium. If in-the-money, the put option will be automatically exercised, selling the corresponding number of shares at the strike price. To avoid a "naked short" position, it's prudent to hold the corresponding stock if you decide to keep the option until expiration.

Automatic exercise conditions:

U.S. Market: if the stock price is $0.01 or more below the strike price at the close of the expiration date.

Hong Kong Market: if the stock price is 1.5% or more below the strike price.