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Basic Option Strategies: Long Put Option Strategy (Part 3)

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We have talked about Long Call and Short Call in our previous two articles about Basic Options Strategies. In this Part 3, we take a look at another basic option strategy which is called Long Put.

About Long Put Strategy

Long put means to buy one put option. Options traders use long put when they believe that the price of the underlying asset will go significantly below the striking price before the option expiration date (American-style) or at the expiration date (European-style).

The chart below shows that if the underlying asset is below the strike price at expiration date, the option buyer will have unlimited profit. If the market rises, the option buyer will only lose the premium he paid if he does not exercise his right. If he does, however, he will have larger losses.

Therefore, long put is a great way to profit from a down turning market without having to buy the underlying asset as your risk is limited to the net premium paid for the option.

The calculation formula for long put strategy is as follows:

[(Strike Price – Market Price at Expiration) x Contract Size ] + Premium Paid

This chart and table illustrates the profit and loss assumptions for different market prices at the expiration date.

Long Put

DETAILS ASSUMPTION
Option Product FBM KLCI Index Option (OKLI)
Underlying Asset FBM KLCI futures (FKLI)
Current Market Price E.g ≥ RM1,640
Strategy Buy 1 Lot OKLI at RM1,640 (The Strike Price)
Put Option at RM20 (The Premium)
(Out-of-the-money)
Premium = Premium Paid x Contract Size
= RM20 x 50
= RM 1,000
Breakeven Point RM 1,620

IF MARKET PRICE AT EXPIRATION IS: PROFIT/LOSS ASSUMPTION
1580 =[(1640 – 1580) x 50] – RM 1,000
= RM3,000 – RM 1,000
= RM2,000 (Net Profit)
1620 = [(1640 – 1580) x 50] + RM 1,000
= RM 1,000 – RM 1,000
= RM 0 (No Gain or Loss)
1660 *If Market Price at Expiration is above 1,640, the maximum the buyer can lose is still the premium he paid if he does not exercise his right. (If he does, this will incur larger losses.)

 

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This article is contributed by Wan Zuraiha Zakaria and Jeremy Lim, both of whom are staff writers at Oriental Pacific Futures (OPF). OPF is a futures and options broker based in Kuala Lumpur, Malaysia and provides electronic trading, brokerage and clearing services to retail and institutional traders since 2007. OPF is licensed under the Securities Commissions of Malaysia and offers cash-settled derivatives instruments traded on Bursa Malaysia, as well as select major derivatives exchanges around the world.

Oriental Pacific Futures articles published on the Corporate Website (www.opf.com.my) may be reprinted, reposted or distributed free for educational purposes only on the condition that Oriental Pacific Futures and the Corporate Website link information http://www.opf.com.my are included. However, other organizations are invited to link to articles that are available in the public area of the Oriental Pacific Futures’ Learning Resources website. No additional permission is needed for such a link.

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