Construction

It is the simplest bearish strategy, which consists of the purchase of puts.

When to use

When we believe that the price of the underline security will fall. Preferably we want the implied volatility to be relatively low.

Loss/Profit at expiration

Maximum loss: Limited to the premium we paid + commissions.

Maximum profit: Very high (until the stock falls to zero) – commissions.

Profit/Loss diagram

This is the profit/loss diagram for a long put with strike price $25 and premium $2.

Long put strategy example

In the daily chart of stock RIMM we can see that in the context of a long term downtrend, price is visiting a resistance level (point A). The market (SPY) is also in a downtrend so this is a high probability reversal. We can buy put options when the stock is at point A, with strike price $15. As long as the stock is falling from this level our long put position will be gaining in value. We can close it anytime we like before expiration.