Long Put Option: Profit Calculator and Payoff Visualizer

What is a Long Put Option?

The long put strategy in options trading is as bearish as it gets. This strategy involves buying stand-alone put options to profit if the underlying asset price moves lower. Long options allow traders to leverage their capital with limited risk, as the maximum loss is limited to the premium paid.

Time decay poses a significant risk for long options, particularly for out-of-the-money (OTM) options. If the drop is not significant enough, OTM put options can lose value even as the underlying asset's price declines. This makes the timing and size of price movements crucial for the profitability of long puts.

Long Put: Payoff Diagram and Calculations

Here are the straightforward payoff calculations for the long put options trading strategy. Our long put calculator at the beginning of this article will allow you to visualize payoffs for any scenario.

Long Put Max Profit

• Formula: Strike price x 100 - premium paid
• Explanation: The maximum profit is achieved when the underlying asset’s price falls to zero. At that point, the put option's intrinsic value is the strike price minus the premium paid.

Long Put Max Loss

• Formula: Premium paid
• Explanation: The max loss is limited to the amount paid to purchase the put option. This occurs if the option expires worthless, meaning the underlying asset’s price remains at or above the strike price at expiration.

Long Put Breakeven Point

• Formula: Strike price - premium paid‍
• Explanation: To reach breakeven on a long put, the price of the underlying asset must drop below the strike price minus the premium paid. At this point, the gains from the option equal the cost incurred to purchase it.

Types of Long Put Options

There are two different types of option contracts: American-style and European-style options.

American Style Options

Most stock and ETF options are American-style, meaning they allow for early exercise. This flexibility exists because these options are tied to tradable underlying securities, such as stocks or ETFs.

European Style Options

Most index options are European-style, meaning they can only be exercised at expiration. This structure is common for indices like SPX (S&P 500 Index) and NDX (Nasdaq-100 Index), which lack an underlying tradable security.

Because these options are cash-settled, early exercise provides no advantage. Instead, their final settlement value is determined at expiration based on the index level at that time.

Put Options and Moneyness

Like all options, put options can exist in one of three moneyness states. While all put options are inherently bearish, their moneyness state indicates the degree of bearishness.

At-the-Money (ATM)

ATM put options have a strike price equal to the underlying asset's current price. These options are a balanced choice: they cost more than OTM options but less than ITM options.

While they initially lack intrinsic value, they offer a good mix of risk and reward, making them ideal for traders expecting a moderate to significant bearish move in the underlying asset.

Out-of-the-Money (OTM)

OTM put options have a strike price lower than the current stock price. These options have no intrinsic value, meaning their entire premium is extrinsic, influenced by implied volatility and time to expiration.

OTM puts are the most cost-effective, making them ideal for traders with an extremely bearish outlook who want to leverage with minimal upfront cost.

However, these options have the lowest probability of profit, as the underlying asset must fall significantly below the strike price before expiration to become profitable.

In-the-Money (ITM)

ITM put options have a higher strike price than the current stock price. Because of their high intrinsic value, these options have the highest premiums.

If you are moderately bearish on an underlying, ITM put options provide more stable returns due to their higher delta (sensitivity to price changes).

However, their high premium comes with the greatest upfront cost but also offers the highest probability of profit. Deep ITM options behave similarly to short stock positions, offering more consistent returns as the underlying asset falls.

Long Call vs Long Put

A long put option gives the owner the right (but not the obligation) to sell the underlying asset at the strike price. For stock options, this means the owner of a long put can exercise their contract and sell 100 shares of the underlying stock at the strike price.

The long put option is the exact opposite strategy of a long call option, which profits when the underlying asset rises in value. Here’s a visual comparing the long call and long put options trading strategies.

Long Put: Real World Example

Let’s say you are bearish on SPY (SPDR S&P 500 ETF Trust) and expect it to decline over the next seven days.

You pull up an options chain and purchase the 600 strike price OTM put option on SPY for $1.31, as seen on the TradingBlock platform below.

Here’s our initial trade:

• Symbol: SPY
• Underlying Price: $605.03
• Strike Price: 600
• Put Option Price (Debit Paid): $1.31 ($131 total)
• Days to Expiration (DTE): 7

Four days have passed, and the current market price of SPY is $604.00, a very small downward move.

What happened to our option?

• Symbol: SPY
• Underlying Price:  $605.03 →  $604.00 
• Strike Price: 600 (unchanged)
• Put Option Price: $1.31 → $0.85
• Days to Expiration (DTE): 7 days → 3 days

As we can see, the option premium has declined significantly even though the price of SPY went down. This is due to what is called time decay, which reduces the value of options as expiration approaches, particularly if the underlying asset does not make a significant move in the anticipated direction.

Long Puts and Time Decay

This decline in value is due to time decay, or theta. When the trade was initiated, there were 7 days remaining for SPY to drop below the strike price of 600. With only 3 days remaining, there is less time for SPY to make the required move, reducing the likelihood of the option closing ITM.

Time decay accelerates as expiration approaches, particularly for out-of-the-money (OTM) options like this one, which consists entirely of extrinsic value (time and implied volatility). Here’s how this decay ate away at our option premium over time:

Note that this example assumes implied volatility remains constant. If SPY experienced higher volatility, the price of all options would increase. Interest rates and other market conditions also play a role but to a smaller degree.

Long Puts: Delta and Gamma

Theta is just one Greek. You can monitor the other option Greeks, such as delta and gamma, to gauge your put option’s sensitivity to price movements and how that sensitivity evolves as the market moves.

• Delta: Represents how much the option’s price changes for every $1 move in the underlying asset. Long puts have a negative delta, meaning they increase in value as the underlying price drops.‍
• Gamma: Measures the rate of change in delta. Long puts have positive gamma, which means their delta becomes more negative as the underlying price falls, amplifying gains as the move strengthens.

Explore Options With Virtual Trading

With TradingBlock’s Virtual Trading platform, you can trade options in a simulated environment. Check it out below today!

⚠️ Options trading involves significant risk and is not suitable for all investors. Commissions and fees can significantly impact your net profit or loss and should always be considered as part of your trading strategy. Please read Characteristics and Risks of Standardized Options before trading options.