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Stock Option Strategies

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Stock Option Strategies: Long Call, Short Call, Covered Call, Long Put, Short Put, Covered Put. These six basic options strategies are the bread and butter of any options trader. In order to become successful in options trading, you have to understand each of these six strategies well.

Stock Option Trading Strategy: Long Put Options

With the long put strategy, you purchase a put option: the right but not the obligation to sell the underlying stock at a specific price until the date of expiry. A long put offers both limited profit potential and limited downside risk. Thus, it is a good way to obtain a high leverage on an underlying security expected to decrease in price.

When you should use long puts

When you expect a fall in the price of the underlying assets.

How do you exit the trade?

If the underlying stock rises above the breakeven price, you can either offset the long put by selling a put option with the same strike price and expiration at an acceptable profit, or exercise the put option to short the underlying asset.

In contrast, if the underlying stock rises above the breakeven point, you can sell an identical put option to offset the loss. The maximum loss would thus be the initial premium paid for the put option.

Compared to shorting the underlying stock, a long put is a more powerful way to gain exposure to the stock. You do not need to use margin, and can easily enter the put. Your downside is protected; the most you can lose is your initial investment. However, long puts will suffer from time decay, so you should look to buy put options with at least 60 days until expiration.

Stock Option Trading Strategy: Short Put Options

With the short strategy, you sell the put option in anticipation of a rise above breakeven, where the short put will therefore expire worthless. Your maximum reward in this case would be the premium received, while your maximum loss would be high.

The breakeven point in the case of a short put is the put strike price subtracted by the put premium.