Explanation

A long put option trading strategy is a single-leg option strategy used by a trader/dealer when he perceives market volatility with a bias towards the downside. To execute this strategy, the trader would purchase options by paying a premium, which gives him the right but not the obligation to sell the underlying asset at a strike price at any time until the expiry date.

Risk

The maximum loss that options buyers could face is the premium paid-for-buying option.

Reward

Maximum reward for option buyer if the worst-case scenario for the market comes true, the price of the underlying losses its value and closes at 0.

Construction

Buy 1 Put Option

Payoff Chart

Option Trading Example

Trader holds a bearish view on the Bank Nifty and expects it to make a steep correction in the near future. Bank Nifty is currently trading around the 39800 level. Trader goes long on 1 lot of 39700 Bank Nifty Put Option for a premium of Rs. 700 with an initial investment will be Rs. 28000. (700*40).

Scenario 1: If at the time of expiry, Bank Nifty makes a move as per the expectation of the trader and dips down to Rs. 38000 level, then the net profit will be Rs. 44000. [(39800 – 38000 -700) *40]

Scenario 2: On the contrary, if the Bank Nifty doesn’t fall or starts to march upward in a direction opposite to the trader’s expectation, then the maximum loss will be the premium amount paid.