If you buy a put, you pay a debit for the right to sell 100 shares of an underlying at the option’s strike price any time before the option expires.
Another way of saying you bought a put is saying you are “long” a put. Being long an option or stock means you own it hoping it increases in value.
Out, At, and In the Money Puts
A put is out of the money (OTM) if the current stock price is above the option’s strike price. All options that expire out of the money expire worthless...because they do not have intrinsic value. If a put is OTM, it means you can sell stock for more in the market than you can by exercising the option.
A put is at the money (ATM) if its strike price is the same as or close to the current stock price. If the stock is at $45.05 the $45.00 put option would be considered the at the money put.
A put is in the money (ITM) if the stock price is below the current strike price. In the money options are exercised at expiration for their intrinsic value. An in the money put lets the owner sell stock for more than its current market value.
When do you buy a put?
Being long a put is being bearish directionally. If the underlying goes down, the put will increase in value (all else being equal). The trade will be profitable if the stock price is less than the strike price minus the debit paid for the option (stock price < strike price - debit paid).
If $AAPL (ticker symbol for Apple) is $128.88 and we buy $125.00 strike price put for $37.00 ($0.37 x 100 shares the option controls) where is our break-even point?
The dough platform gives you a couple ways of finding the break-even point, i.e., where the green profit area starts on the curve page or the Max Profit/Loss column on the "Review & Send" screen.
Mathematically, the break-even point is the strike price ($125.00) minus the debit paid ($0.37) or $125.00 - $0.37 = $124.63 (less commissions).
Implied Volatility for long options
If we buy options, or option spreads, we look for underlyings with low implied volatility rank (IVR). We measure current implied volatility against historical implied volatility to get a relative understanding of where implied volatility is now. If you look on the dough trade page, you will see an implied volatility rank from 0-100 (with 0 being low and 100 being high).
Low implied volatility decreases the amount of premium we pay for an option (debit). Looking at IVR gives us context around historical implied volatility, so we know if the implied volatility is low compared to where it has been previously.
You don’t need to follow a stock to keep track of its implied volatility. Instead, use the grid page on dough to filter underlyings by their IVR for the best strategic opportunities.
HOW Theta Decay AFFECTS VALUE of a long put
Theta decay, or time decay, is the amount a position loses in time value each day. When buying a put, your theta value will be negative. A negative theta means the option that you own will lose value as time passes. Time decay comes out of an option’s extrinsic value. As time passes, people pay less for options because the options duration has decreased. A shorter duration means a decrease in extrinsic value (all else being equal), which is why the price decreases.
It’s crucial to remember that time decay works against you when you are long naked options, as extrinsic value decreases to 0 by expiration.
Long put options have defined risk. Defined risk means you know exactly how much your max loss is at order entry. The most you can lose on any long option is the initial debit you paid for the option.
To check your max loss or max profit for any trade, click the “REVIEW and SEND” button on the trade page.
Buying a put in dough
There are two different ways to buy a put in dough.
If you navigate to the trade page, you can click and drag the put icon on the top left corner of the screen to select a strike price and expiration. To buy an option, you will want to drag the put above the horizontal strike bar that divides the page in two. As you browse through different options, you will see more information listed at the top of the screen in the "You Are Here” area, shown below.
The second way to buy a put is to select “STRATEGIES” on the top left of the trade page. Click “OPTION”, and finally click “GO” next to “Long Put Option.” To adjust the strike price, drag the pentagon option icon left and right on the screen. To adjust the expiration, click the “- TIME” and “+ TIME” buttons. You can also manually adjust the information by double clicking on the pentagon, which will bring up the “edit option” menu.
Long put RECAP
- Buying a put is the same as being long a put.
- When buying an option, you want the price of the option to go up to be profitable.
- A long put has defined risk.
- A long put is a bearish strategy, meaning you want the stock to go down.
Still have questions on long puts? Contact us at email@example.com