Stocks don’t only go up. When you think one is overvalued, or the business is starting to crack, buying a put is the cleanest way to profit from the drop. It’s also the standard way to insure shares you already own.
How a long put works
A put gives you the right, but not the obligation, to sell 100 shares at the strike price before the expiration date. You pay a premium for that right.
- If the stock falls below the strike minus what you paid, you make money.
- If it stays above the strike, the put expires worthless and you lose the premium.
- Your risk is capped at the premium no matter how high the stock goes.
Max profit, max loss and break-even
| Long put | |
|---|---|
| Max profit | Strike price − premium, reached if the stock goes to zero |
| Max loss | The premium you paid |
| Break-even at expiration | Strike price − premium paid |
Why buy a put?
- To profit from a decline. It’s a direct bet that the stock falls.
- Without the open-ended risk of shorting. If you short a stock and it rips higher, your losses have no ceiling. With a put, the worst case is the premium.
- With leverage. You control 100 shares for a fraction of what shorting them would tie up.
It’s also the building block of a protective put, where you buy the put to insure shares you already own.
Worked example
Say you’re bearish on Meta ($META), trading at $350. You buy a $340 put expiring in two months for $10 a share, which is $1,000 for one contract.
- Break-even: $340 − $10 = $330 at expiration.
- META drops to $300: the put is worth $40 a share ($4,000), a $3,000 profit.
- META stays at $350: the put expires worthless and you lose the $1,000.
- META rises to $400: you still lose only the $1,000.
The most this trade could ever make is $330 a share ($33,000) if META went to zero, so the $3,000 at $300 is just one point on the curve.
One more: Tesla ($TSLA) at $250, and you buy a $240 put three months out for $8 ($800). If Tesla drops to $200, the put is worth $40 ($4,000), a $3,200 profit. If Tesla stays above $240, you’re out the $800.
When a long put makes sense
- You’re bearish and expect a real move down before expiration.
- You want to hedge a stock or portfolio against a selloff.
- You want downside exposure without the unlimited risk of a short sale.
What can go wrong
- Time decay. If the stock drifts sideways, the put loses value every day, even if the drop eventually comes.
- Expensive premiums. Puts get pricey when fear is high, which is often exactly when you want them.
- The break-even is lower than the strike. The stock has to fall past the strike minus the premium before you profit.
Tips
- Choose the strike for the job. Out-of-the-money puts are cheaper but need a bigger drop. At-the-money puts cost more but pay off sooner.
- Give the trade time. Bearish theses often take longer to play out than expected, so a little extra time is usually worth paying for.
- Size it so a total loss is fine. If the stock never falls, the put goes to zero.
The options profit calculator will chart the payoff for your own strike and premium.