4.1.3. Long Put
Suppose you think the price of an actively traded commodity like corn is currently overpriced and within the next three months will go into free fall. You could write a futures call option, but you are pretty confident of the direction of the price, and you want to earn more than the price of a premium. You see bigger profits on the horizon and you buy a put instead.
Puts and calls can be bought and sold at various strike prices with varying premiums. Of all the options to buy on corn, you decide to buy this one:
Long Dec Corn 340’0 Put @ 20
You’ve bought the option, so it is a long put. The expiration month is December. The exercise or strike price is $3.40. The premium is $0.20.
A long put is the opposite of a long call. With a long call, you profit when the market price goes up. With a long put, you profit when the market price goes down.
Unlike a call, your breakeven point is the difference between the strike price and the premium, not the sum. As the price falls, you recoup your premium, and you reach your breakeven point when the price of corn falls to $3.20 ($3.40 – $0.20). Let’s assume the price drops to $3.00 and you decide to exercise your long put. You will reap a $0.20 reward per bushel: the strike price ($3.40) minus the market price ($3.00) minus the premium ($0.20), or alternatively, the strike price minus the breakeven point.
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