← Strategy LabLesson 2 · 3:42
Long put
Summary
Use a long put when you think the stock will fall past the strike minus the premium, and soon. You buy the $100 put for $3.41 a share, so $341 is the most you can lose, and the most you can make is $9,659 if XYZ goes to zero. You break even at $96.59 on the last day.
Key terms
- put option
- The right to sell 100 shares at the strike price any time before the option expires.
- strike price
- The locked price in an option at which you can buy or sell.
- premium
- What you pay for an option, which you don't get back, and the most you can lose when you buy one.
- break-even
- The stock price on the last day where you neither make nor lose money: strike plus premium for a call, strike minus premium for a put.
- shorting
- Borrowing shares, selling them, and hoping to buy them back cheaper later.
- time value
- The rest of an option's price, paid for the chance things get better before the end, and gone by the last day.
Check yourself
Answer each question to see why the right answer is right.
1. You buy one XYZ $100 put priced at $3.41 a share. What does it cost you?
2. Where does this long put break even on the last day?
3. What is the most you can make on this long put?
4. XYZ ends at $90 on the last day. What is your result?
5. XYZ ends exactly at $100 on the last day. What is your result?
Finished the video and the quiz? .