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Long Put

Analyzing the risk profile of a long put strategy

Risk Profile & Summary

Standard Setup

Long puts are established by paying a debit for the desired strike.
Risk Profile: 50 Delta Long Put

How It Works

A long put is a
strategy that reserves us the right to sell 100 shares at the strike price. Puts have a limited life-span, and in order to turn a profit, the share value must fall below the strike plus the debit paid before they expire. This gives them an extremely low
Long puts can profit as the share price falls all the way to $0, and have limited upside risk. The most you can lose is the amount you pay for them.

Why We Do This

Due to their low
we don't use long puts as a stand alone strategy. Long puts can be useful as a component of other option strategies. They are typically used to cap the downside risk of our

Summary

Assumption Bearish
A long put can profit when the share value declines. This, however, is dependent on the speed and magnitude of the decline.
Cost Basis Debit
The cost basis for a long put is equal to the total debit paid (plus
and fees). It is calculated by multiplying the price of the put by 100.

Cost Basis = Put Price × 100
POP Low
A long put has less than a 50% probability of profit. The farther
the put is, the lower its POP will be. Deep
puts will slowly approach 50% POP but never quite get there because of their
Capital Requirement Low
Low POP comes with low buying power requirements. Long puts can be used as a low capital (not necessarily low cost) bearish strategy.
Break Even (before commission and fees) The break-even for a single long put is calculated by subtracting the debit paid from the strike price. The higher the b/e, the better.

B/E = Strike - Debit
Maximum Profit Long puts can profit until the share price drops completely to zero. Max profit is calculated by subtracting the cost of the put from the strike, and multiplying by 100.

Max Profit = (Strike - Debit) × 100
Maximum Loss Debit Paid
The maximum amount you can lose on long put is the total debit paid. This is calculated by multiplying the price of the put by 100.

Max Loss = Put Price × 100
Capital Allocation (per position) 0%
At Food for Theta, we will never long puts as a stand alone strategy due to their low probability of profit. Long puts will only be used as components of
to contain risk or reduce capital requirements.
Profit Target None
Since we won't be using long puts as a stand alone strategy, there is no profit target.
Delta (P/L rate of change) Dynamic, Negative
Long puts carry dynamic, negative delta. This means they are a bearish strategy with fluctuating delta. Delta approaches 0 as the share price rises, and approaches -100 as the share price falls.
Theta (Time decay) Negative
Long puts are disadvantaged by the passage of time. As
nears, their extrinsic value will decay.
Vega (Implied volatility sensitivity) Positive
Long puts carry positive vega. This means they benefit from increases in
They lose value when volatility contracts.
Gamma (P/L Momentum) Positive
Long puts carry positive gamma which means their delta increases (becomes less negative) as the share price rises. In practical terms, they accelerate into profit, and slow into loss.

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