Buying Puts Summary

For those who are very bearish on a particular stock over the near- or long-term, and who require a known, limited upside risk, buying a put might be an appropriate strategy to use. Purchasing a put option usually requires a smaller initial cash investment than the margin requirement for a short sale of stock. In addition, there are neither margin calls, nor does a put holder pay any dividends. This reduces the capital at risk and offers the potential of leveraged profits if a bearish opinion proves correct. As the underlying stock continues to decrease, the long put's profit potential is limited only by the underlying stock declining to zero, and large returns on investment can be seen. On the upside, the investor with a short stock position is exposed to a potentially unlimited dollar loss from an increase in share value, while the put buyer's maximum loss is known in advance and is limited entirely to the option's purchase price.

Today's investor has a choice of shorter-term expiration months afforded by regular equity option contracts, longer-term expirations available with LEAPS®, as well as multiple strike prices. So no matter an investor's anticipated target price for an underlying stock after a bearish move, or the time frame over which this move might occur, there is most likely a put contract that fits both his outlook and tolerance for risk.

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