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Long Put



	A long put can be an ideal tool for an investor who wishes
	to participate profitably from a downward price move in the
	underlying stock. Before moving into more complex bearish 
	strategies, an investor should thoroughly understand the 
	fundamentals about buying and holding put options. 

Market Opinion?
	Bearish

When to Use?
	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 realize financial
	 reward from a decrease in price of the underlying security. 
	This investor is generally more interested in the dollar amount
	of his initial investment and the leveraged financial reward 
	that long puts can offer than in the number of contracts purchased. 

	Experience and precision are key in selecting the right 
	option (expiration and/or 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. 



Benefit
	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. As with a long call, an investor who purchased
	and is holding a long put has predetermined, limited financial risk
	versus the unlimited upside risk from a short stock sale. 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. 
	
Risk vs. Reward 
	Maximum Profit: Limited Only by Stock Declining to Zero

Maximum Loss: Limited
	Premium Paid

Upside Profit at Expiration: 
	Strike Price - Stock Price at Expiration - Premium Paid 
	Assuming Stock Price Below BEP
	
	The maximum profit amount can be limited by the stock's potential 
	decrease to no less than zero. At expiration 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. 

Break-Even-Point (BEP)?
	BEP: Strike Price - Premium Paid 

	Before expiration, however, if the contract's market price has 
	sufficient time value remaining, the BEP can occur at a higher stock
	price. 

Volatility
	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.

Time Decay?
	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. 

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

Alternatives at expiration?
	At expiration 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. 
	        
	      



 
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