Buying (long) put options

Long puts allows investors to participate in downward price moves in underlying stocks and indices just as long calls do for upward price moves. Importantly both long puts and calls provide exposure for a limited known outlay.

Long Put example

Break-even price: Strike Price - Premium Paid

Bearish outlook.

Purchasing puts without owning shares of the underlying stock is a purely directional strategy
used for bearish speculation. The primary motivation of this investor is to realise financial reward from a decrease in price of the underlying security.

Experience and precision are key in selecting the right option (expiration and strike price)
for the most profitable result. In general, the more out-of-the-money the put purchased is the
more bearish the strategy, as bigger decreases in the underlying stock price are required for
the option to reach the break-even point.

A long put offers a leveraged alternative to a bearish, or "short sale" of the underlying stock,
and offers less potential risk to the investor.  Purchasing a put generally requires lower up-front capital commitment than the margin required to establish a short stock position. Regardless of market conditions, a long put will never require a margin call. As the contract becomes more profitable, increasing leverage can result in large percentage profits.

Maximum Profit: Limited Only by Stock Declining to Zero
Maximum Loss: Limited
Premium Paid
Upside Profit at Expiry: Strike Price - Stock Price at Expiry - Premium Paid

The maximum profit amount can be limited by the stock's potential decrease to no less than
zero. At expiry an in-the-money put will generally be worth its intrinsic value. Though the
potential loss is predetermined and limited in dollar amount, it can be as much as 100% of the
premium initially paid for the put. Whatever your motivation for purchasing the put, weigh the
potential reward against the potential loss of the entire premium paid.


If Volatility Increases: Positive Effect
If Volatility Decreases: Negative Effect

 
Any effect of volatility on the option's total premium is on the time value portion.

Passage of Time: Negative Effect

The time value portion of an option's premium, which the option holder has "purchased" when
paying for the option, generally decreases, or decays, with the passage of time. This decrease accelerates as the option contract approaches expiration. A market observer will notice that
time decay for puts occurs at a slightly slower rate than with calls.  

At any given time before expiry, a put option holder can sell the put in the listed options
marketplace to close out the position. This can be done to either realise a profitable gain in
the option's premium, or to cut a loss.

At expiry most investors holding an in-the-money put will elect to sell the option in the
marketplace if it has value, before the end of trading on the option's last trading day. An
alternative is to purchase an equivalent number of shares in the marketplace, exercise the
long put and then sell them to a put writer at the option's strike price. The third choice, one
resulting in considerable risk, is to exercise the put, sell the underlying shares and establish
a short stock position in an appropriate type of brokerage account.