Understanding the Long Position in a Put Option: Strategy, Use Cases & Trading Insights

What Is a Long Position in a Put Option?

Trading in the market goes beyond understanding the market sentiments or news. Many instruments in this realm are complex and advanced, including Options.

Before understanding what a long put position means, let’s recap what option trading is. Options are leverage instruments like CFDs, where traders can assign a margin of their capital to take a position with amplified exposure. Like CFDs, the value of options contracts is based on their underlying assets, but unlike CFDs, contracts are priced based on “strike prices,” and traders either go long (buy) or short (sell) them based on their outlook and the outlook’s severity.

A long put position is a bearish position taken when a trader expects the underlying to fall to a certain level. Keep reading, and you’ll understand more about the long put position, the strategies that go with it, the risks that come with it, and a long list of similar details.

Long Put Position vs Short Put & Long Call

Options orders have a few combinations. Long and short is about the action you will take, and call and put is about the outlook you have. So, you could take four types of positions when initiating a trade in the options market. Below is a simple comparison of a long put position, a short put and long call.

How a Long Put Position Works

A long put position gives the trader the right to sell an underlying asset at a predetermined price within a specific time frame. You pay a premium, which becomes your maximum possible loss.

With a long put position, if the market price falls below the strike price, the put’s value increases. The trader can book their profits. If the market doesn’t move as expected, the options could expire worthless, and the trader would lose the premium they paid.

When to Use a Long Put?

This position is not just about a bearish outlook. When structured and layered through a proper strategy, a long put position can become a tool to help balance and improve your portfolio performance. Traders typically use this position in two distinct situations.

As a Hedger

Even a well-diversified portfolio stands in a precarious position when the broader market is on a downturn. In situations such as these, a long put position can become helpful.

Hedging with a long put position during bearish markets can be beneficial for several reasons.

Capitalize on Bearish Movements

Traders take a long position in a put option to profit from a falling market. In other assets, short selling could play out differently, hence the preference to put positions.

Some factors to keep in mind while taking a long put position are:

Short positions tend to work best when:

Strategies with Long Put Position

Professional traders often couple instruments and positions to manage risk more effectively. Long put position has a place in several of those layered positions.

Long Put Short Call Strategy

In the long put short call strategy, you take the following positions:

With this structure, the position benefits when prices decline and remain below the call strike. The call premium provides upfront income, while falling prices increase the value of the put. This increases cost, but reduces overall risk if appropriately monitored.

Protective Put

A portfolio exposed to several risks, a protective long position in a put option can look like:

The put acts as an insurance. If the asset drops sharply, the losses are capped. If prices rise, the only cost is the premium paid for protection. This manages downside risk during falling markets.

Bear Put Spread

Markets are quick to catch up to trends. With a bear put spread:

Compared to a single long put, a bear put spread lowers the upfront cost by selling a lower-strike put. Profits are capped here and work best in a moderately bearish market, not during sharp swings.

Benefits and Risks of a Long Put Position

In financial markets, risks and rewards are inseparable. With long put positions, the pros and cons could be as follows.

Benefits of Long Put Position

The advantages of taking long put positions are:

Risks of Long Put Position

Some downsides of taking long put positions are:

Where to Take Long Put Positions

A long put position can be taken across multiple underlying assets to accommodate various market conditions and strategies. With every position, you should be mindful of how well it can be managed. Therefore, along with strategy, the broker and platform you choose are also integral to a smooth trading experience in the markets.

With Stocks

Long puts are commonly used with shares, especially when individual stocks show signs of weakness. Price action trading calls for long put positions and other bearish strategies when markets turn bearish. Investors can choose individual stock contracts, thereby making their strategy specific to the stock positions they hold.

With Commodities or Currencies

Macro-economic conditions, geopolitical news, and global trends impact both commodities and currencies. Traders take a long put position when broader market sentiments sour. Since several commodities and currencies are defensive assets, bearish trends can arise during bullish stock market trends, too.

With Indices and Other ETPs

Broad-market downside can be expressed through puts on indices or index-linked ETPs. Index-based long puts are also commonly used for portfolio protection, as they hedge overall exposure while avoiding the complexity of managing multiple single-stock positions.