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The Long Put
It took me a while to understand what a put was. It always seemed a little strange. Having a “right” to sell shares of the underlying stock at a given strike price didn’t seem logical at first. I didn’t own the shares, so I felt like I was missing something.
But you don’t have to own the shares to buy a put. So the question is: Do you eventually have to buy shares to realize the gain from a put?
The answer is “no”. There are three ways you can realize a gain on a put – only two of which require you to sell shares:
- Sell the option on, or before, expiration day (most popular)
- Buy the shares and then exercise the long put (requires cash to buy the shares and a commission to exercise the option)
- Exercise the put, and establish a short stock position if your account’s buying power allows it.
Puts as Insurance
Some traders advocate using puts as insurance against a downward movement in a key stock position. This is called a “protective put” strategy.
You should buy at-the-money puts to get the most insurance and still get upside potential on the stock position. When it all nets out, your cash outlay will be limited to the time-value portion of the option premium. But you have to roll into new puts to maintain the insurance over time and this recurring cost can be prohibitive.
Positive vol change:
Increased volatility will increase the value of your long put
Negative vol change:
Decreased volatility will lower the price of the option slightly
Some useful videos to watch
