What is a long put option?

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Options strategies – long put 
Benefits, risks and examples of a long put option.

The long put option strategy anticipates a decline in the price of an underlying asset. This strategy allows for significant profit potential with limited risk, making it an attractive choice for bearish market conditions. This article explores the fundamentals of the long put option strategy, its benefits and risks, and how to effectively implement it.

What is a put option?

A put option is a financial contract that gives the holder the right, but not the obligation, to sell a specified quantity of an underlying asset at a predetermined price (the strike price) within a set period. The buyer of the put option pays a premium to the seller for this right. 

In return, the seller of the option has the obligation to buy, upon the request of the buyer, a specified quantity of an underlying asset at a predetermined price (the strike price). This strategy is known as a short put option. 

Unlike a call option, which benefits from rising prices, a put option profits when the underlying asset’s price falls.

Both buyers and sellers of put options can terminate either their right or obligation by a reverse (closing) transaction.

Understanding the long put option strategy

A long put option strategy involves purchasing put options with the expectation that the underlying asset’s price will decline. This bearish strategy allows the investor to capitalise on downward price movements, providing an opportunity for significant profits while limiting potential losses to the premium paid.

Key components of a long put option

  1. Premium
    The price paid for the option.
  2. Strike price
    The predetermined price at which the holder can sell the underlying asset.
  3. Expiry date
    The date by which the option must be exercised or will expire worthless.

Advantages of the long put option strategy

  1. Limited risk
    The maximum loss is limited to the premium paid, providing a defined risk strategy.
  2. Leverage
    Put options provide leverage, allowing investors to control a larger position with a smaller capital outlay compared to short selling the stock outright.
  3. Profit potential
    Significant profits can be realised if the underlying asset depreciates substantially, offering high reward potential for a relatively low initial investment.
  4. Hedging
    Investors can use long puts to hedge against potential declines in their existing stock positions, effectively reducing the overall risk of their portfolio.

Risks of the long put option strategy

  1. Time decay
    Options are wasting assets, meaning their value erodes over time, especially as the expiry date approaches. This time decay can work against the investor if the expected price movement does not occur quickly enough.
  2. Volatility
    While options can benefit from increased volatility, unexpected decreases in volatility can reduce the option’s value.
  3. Out-of-the-money risk
    If the underlying asset does not fall below the strike price by expiry, the option will expire worthless, resulting in a total loss of the premium paid.

Example of a long put option

Suppose you believe Company XYZ’s stock, currently trading at €50, will decline significantly over the next three months. You decide to purchase a put option with a strike price of €45 expiring in three months, costing €3 per share (options typically represent 100 shares, so the total cost would be €300).

Long put - Euronext
 

Profit and loss potential of a long put

  • Breakeven point
    The stock price at expiry must fall below the strike price minus the premium paid for the investor to break even. In this example, the breakeven price would be €42 (€45 strike price – €3 premium).
  • Potential profit
    If the stock price falls significantly below the breakeven point, the profit potential increases. For example, if XYZ’s stock drops to €30, the profit would be (€45 – €30 – €3) x 100 = €1,200. As the stock price would not drop below €0 the profit is maxed at €4,200.
  • Maximised potential loss
    The maximum loss is limited to the premium paid. In this case, the most the investor can lose is €300 if the stock remains above €45 by the expiry date.

Implementing the long put option strategy

  1. Market analysis
    Conduct thorough research and analysis to identify potential stocks or assets expected to decline in value. This can involve technical analysis, fundamental analysis, or both.
  2. Select the strike price and expiry date
    Choose a strike price that reflects your market outlook and an expiry date that allows enough time for the expected price movement to occur.
  3. Monitor the position
    Regularly review the position and market conditions. Be prepared to adjust the strategy if the underlying asset’s price movement or volatility changes significantly.
  4. Exiting the position
    Decide in advance your profit targets and loss limits. Consider exiting the position if the stock reaches your target price or if it becomes clear that the expected price movement will not occur within the desired timeframe.

Long put vs. other strategies

The long put option strategy is often compared with other strategies like short selling, long call options, and protective puts.

Versus short selling
A long put benefits from price declines and has limited risk (the premium paid), while short selling involves borrowing and selling the stock, which can carry unlimited risk and margin requirements.

Versus long call options
While a long call profits from price increases, a long put profits from price decreases, making it a complementary strategy for bearish market views.

Versus protective puts
Protective puts involve buying put options to hedge an existing stock position. A long put can serve a similar purpose but is used independently to speculate on price declines.

Practical tips to increase the possibility for success

  • Start small
    If you’re new to options trading, start with a small position to understand how the market works and gain experience without taking on significant risk.
  • Use technical analysis
    Technical indicators and chart patterns can help identify potential entry and exit points for the strategy.
  • Stay informed
    Keep up with market news, earnings reports, and other factors that can influence the price of the underlying asset.
  • Risk management
    Always be aware of your risk tolerance and never invest more than you can afford to lose.
  • Diversify
    Don’t put all your capital into one position. Diversifying your investments can help spread risk and increase the chances of overall success.

The long put option strategy is a powerful tool for investors looking to capitalise on anticipated price declines in an underlying asset while limiting their downside risk. By understanding the key components, advantages, and risks, and by implementing the strategy with careful market analysis and risk management, investors can potentially achieve significant profits. As with any investment strategy, thorough research and prudent decision-making are essential for success in options trading.

Investing in the financial markets requires a deep understanding of various strategies to maximise returns while managing risk. Please consult your bank or broker for advice or read the Key Information Document to get a better understanding of all risks and costs involved.

See also:

Euronext announces volumes for September 2024

Join IPOready 2025: Euronext’s pre-IPO training programme now accepting applications

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Euronext has officially opened applications for its 2025 IPOready programme, a six-month initiative designed to help business leaders prepare for listing. The programme, which you can join in nine countries and is open to all European companies, will begin in January 2025, with applications closing on 8 November.

Discover the best listing path for your company

For many companies, considering going public raises critical questions such as: "How do I list my company?" and "Is an initial public offering (IPO) the right move for my business?“. IPOready is tailored to address these questions, offering comprehensive guidance through expert-led workshops, personalised coaching, and exclusive webinars, including sessions by the prestigious INSEAD business school.

A network of experts

Supported by a network of more than 80 expert partners and sponsors, IPOready has already trained over 1,080 companies across Europe, equipping them with the insights needed to navigate the capital markets and make informed decisions about going public.

Connect with business leaders across Europe

As part of the IPOready programme, you will benefit from a two-day European campus experience, allowing you to connect with experts and peers from across the continent, an essential tool for executives considering an IPO or other financing routes.

What previous IPOready participants are saying

Executives who have completed IPOready report significant benefits.

Joakim Dahlen, Finance Manager at Dignio and alumnus of IPOready 2024:
“The IPOready programme is very useful for understanding what you’re about to undertake. It’s also a great opportunity to meet new people and establish a solid network before starting the process.”

Sébastien Guillot, CEO of CF Group France and alumnus of IPOready 2024:  

“Under-promise, over-deliver! The IPOready programme aligns perfectly with our approach to preparation and anticipation for a possible IPO.”

Apply now for IPOready 2025

IPOready offers a unique chance for European business leaders to take their companies to the next level. Applications for the 2025 cohort are open until Friday 8 November, with limited spaces available.
 

Find more information about the IPOready 2025 programme on the Euronext website or apply NOW for IPOready 2025.

 

Euronext strengthens European derivatives offer with new German, Irish and Portuguese Single Stock Options

ISIN-LEI Mapping Initiative

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Euronext Securities Porto joins ISIN-LEI Mapping Initiative to enhance market transparency and global data coverage.

The ISIN-LEI Mapping initiative is a cooperative agreement launched by GLEIF (Global Legal Entity Identifier Foundation) and ANNA (Association of National Numbering Agencies) with the mission to aggregate data related to securities and their related entities - ISIN (ISO 6166) codes and LEI (ISO 17442) codes, respectively - to enhance global coverage and the quality of LEI codes.

This initiative, which highlights ANNA's commitment and mission to promote the use of international identifiers, was established to improve market transparency by linking issuers to their respective securities issuances.

Additional information can be found on the ANNA website

Euronext Securities Porto, part of Euronext's network of CSDs, has recently joined this initiative, reaffirming its commitment to the advancing the securities industry, and contributing to the effective functioning and transparency of the markets.

A broader range of Single Stock Options available on Euronext

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Euronext expands its range of pan-European derivatives contracts to offer broader trading opportunities to market participants.

Euronext currently offers an extensive range of Single Stock Options on Belgian, Dutch, French, German, Italian and Norwegian underlyings, and is expanding this scope by listing new options domiciled in additional European countries, to offer a unified and interdependent derivatives market in Europe.

Investors can now gain exposure on new German, Irish and Portuguese underlyingswhile benefitting from a single pool of liquidity and clearing efficiencies with Euronext's own CCP, Euronext Clearing.

Gain exposure on all the stocks in the DAX 40 Index with the German Equity Options

To complete the twenty pre-existing German Equity Options listed in 2019, Euronext is introducing new German Single Stock Options, making all constituents of the German national index now available for trading via Euronext. 

List of German stock options

Introduction of Irish and Portuguese Single Stock Options

Leverage more investing opportunities with the first-listed Irish Options on Euronext Amsterdam, and new Portuguese Options on Euronext Lisbon, positioning Euronext as the only exchange to offer options on Portuguese stocks.

list of portuguese stock options

List of Irish stock options

Key benefits of trading these new options

  • A single order book, powered by Euronext’s Optiq trading platform
  • A unique pool of liquidity gathering a diversified range of investors from retail participants to market makers
  • Robust risk management capabilities via Euronext Clearing
  • Significant clearing efficiencies at the portfolio level and cross-product margin offsets thanks to Value-at-Risk margin methodology
  • Attractive and competitive pricing for all account types
  • Leverage on local Central Securities Depositories for reduced settlement fees and increased post-trade capability:
    - German Options: Clearstream Bank A.G. or Euroclear France
    - Irish Options: Euroclear Bank
    - Portuguese Options: Euronext Securities Porto

Download the brochure

Liquidity guaranteed by supportive market makers, including:

Susquehanna-Logo2024

 

 

New Euronext Single Stock Options in the spotlights

Read the press release

Looking back on the bell and gong ceremonies organised in Lisbon and Amsterdam

More information about options at Euronext

What is an option and how does options trading work?   Euronext Options Investing E-learning

Discover Euronext Equity Index Options

Euronext Securities expands its services offering with the acquisition of Acupay

Euronext Group's ELITE ecosystem launches its first cohort of companies in France 

Commodities Newsletter - Spring 2024

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Volume & highlights of the quarter

Q1 2024 was our best quarter ever in terms of volume and ADV, primarily driven by Euronext Wheat and Rapeseed Futures contracts. 

The volatility in the grains markets dropped in the beginning of 2024 which, along with low price levels, limited the interest in options while creating more interest in futures. Grains prices had been declining throughout the first quarter amid limited demand from destinations and ample supply from the Black Sea region.

Additionally, the weather conditions for the new crop were rather favourable in this region and in the United States, adding pressure on the prices. This bearish trend prompted some market players to readjust their positions, resulting in an increase in traded volumes.

In Q1 2024, we saw +30% in total volume vs Q1 2023, and +24% vs Q4 2023.

It was also a record month for total volume, with 2.8 million futures and options lots traded in February 2024.

Commodities Chart
Euronext MATIF contracts


Consultation on Euronext Corn

In 2023, we consulted the corn market to see how to improve our existing offering.

The qualitative consultation was followed by an online questionnaire. The objective was to meet market players' needs when deciding on potential changes to the Corn Futures contract and functionality.

You will find the conclusion of the questionnaire below, with several suggestions that seem to be a good starting point for us to deep dive. 

We will evaluate the different options in detail and publish our decision later.

Corn Questionnaire Results
Corn Questionnaire Results


Latest news about the Durum Wheat contract

The attraction for the durum wheat contract is growing. In March 2024, it settled with open positions for the first time, and we expect more volumes in the coming months.

The evolution of the Sitagri European Durum Wheat Index (SEDWI) is available on the Euronext website and its weekly average, provided by FinanceAgri, is published every Monday.

For more information, visit the Durum Wheat webpage

Introducing the Euronext Salmon Futures

We will soon release a new cash-settled futures contract on salmon, listed on Euronext Paris.

Based on the Sitagri Salmon Spot Index (SISALMONI), this contract will be available in the EUA test environment from 6 June 2024. The first trading day is scheduled for Monday 22 July 2024.

News on the clearing migration

Euronext Clearing became the default CCP for our cash markets in Amsterdam, Brussels, Dublin, Lisbon and Paris in Autumn 2023. It currently clears equities, ETFs, structured products, warrants, and bonds across six Euronext markets, including the Italian markets.

Subject to regulatory approval, the migration of our listed commodity derivatives contracts to Euronext Clearing will be on 1 July 2024.

For more information, check out the annexes of the delivery procedure:

Milling Wheat Futures   |   Corn Futures   |   Rapeseed Futures

New Head of Agricultural Commodities

Robin Maisonneuve

 

 

Effective as of 1 April 2024, Robin Maisonneuve has been appointed as Head of Agricultural Commodities, based in Paris. His role includes overseeing the activities of the Euronext MATIF franchise.

Find out more

See all our contracts on the Euronext Live Markets website.

Contact our team: commodities@euronext.com 

Predict lists on Euronext Growth Milan