How To Buy A Long Put Option on 100 Shares: Step-by-Step Guide

What is a Put Option?

Before we go to the ‘How to buy a long put option‘ guide, let’s quickly recap what a put option is. As the name suggests, a put ‘option’ is a contract that gives you the option of selling 100 shares of a stock at a pre-determined price. You can choose to exercise the option or choose not to exercise the option to sell those 100 shares.

When you buy a put option (hence called a long put option), you buy the contract that will allow you to sell 100 shares of a stock at a fixed price (called the strike price). But, this contract is not valid indefinitely, it comes with an expiration date. The expiration date and the strike price play a crucial role in determining the price (premium) of the contract.

For more details check out the following article: Call vs Put Options

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Why Buy a Put Option?

Put options provide investors with financial leverage. For example, if you believe a stock trading at $100 today is overpriced and has huge downside potential, you can do a couple of things:

you can borrow from a broker and sell the shares at the current price, in order to buy them back later at a lower price. This process is called ‘short selling’ or simply ‘shorting’. This has a huge risk associated with it, and beginners and intermediates should AVOID shorting.
you can gain financial leverage by buying a put option to tap the downside potential of the stock.

Case 1: I am reiterating, beginners should avoid ‘short selling’ as it has huge risks associated with it.

Case 2: We will discuss in detail how to buy a put option in this article, as the put option has limited risk.

If you are convinced that the stock price will fall within the next few days, weeks, or months, you can choose to buy a put option with the most suitable expiration date + strike price and bet on the downside of the stock by paying a premium. The premium for the put option is generally a fraction of the cost of 100 shares, hence giving you the financial leverage we talked about earlier.

Need a primer on investing in the stock market? See below:

How to Buy a Long Put Option on Robinhood (Step by Step Guide)

Step 1. Search For Desired Stock or ETF.

Search for the stock for which you want to buy the put option. For the demo, we are looking at the Apple stock (AAPL). Click on the stock name to proceed with the selection.

Search for the stock for which you want to buy the put option. For the demo, we are looking at the Apple stock (AAPL). Click on the stock name to proceed with the selection.

Step 2. Click on the ‘Trade’ button at the bottom right of the screen.

Click on the ‘Trade’ button at the bottom right of the screen.

Step 3. A small menu will up, select ‘Trade Options’ on the menu.

A small menu will up, select ‘Trade Options’ on the menu.

Step 4. Now the main Option Trading screen will appear.

4a. On the top row there is a list of expiration dates, you can slide right and left to pick an expiration date.

4b. On the buttons right below the expiration dates, select ‘Buy’ and ‘Put’

Note that the current stock price is also indicated, ‘Share Price: $128.18’.

The Put Options with ‘Strike Prices’ lower than the current share price ($128.18) are called ‘Out of Money Put Options’. Here, on the screenshot, we can see Out of Money Put Options with Strike Prices of $125, $120, $115. To view more strike prices, you can scroll up and down.

The Put Options with ‘Strike Prices’ higher than the current share price ($128.18) are called ‘In The Money Put Options’. Here, on the screenshot, we can see In The Money Put Options with Strike Prices $130, $135, $140. To view more strike prices, you can scroll up and down.

Now the main Option Trading screen will appear.

a. On the top row there is a list of expiration dates, you can slide right and left to pick an expiration date.

b. On the buttons right below the expiration dates, select ‘Buy’ and ‘Put’

How to Buy an In The Money Put Option (ITM) on Robinhood

Continuing from steps 1-4 described above.

For the demo, we are buying 1 contract with a limit price of $28 per share. Our total cost of the order would be 1 contract * $28 per share * 100 shares per contract = $2,800.

Hit Review when ready.

Some Quick Math on the Put Option with Strike Price $130

The breakeven point of this put option contract would be $130 – $28 = $102. If Apple stock falls below the breakeven point, the investor makes profits. Technically with every dollar decrease below $102, the investor makes $100 (assuming the investor buys 1 contract of 100 shares). So, simply speaking, if the Apple stock falls to $50 before the expiry date (3/17/2023), the investor can make $102 – $50 = $52 profit per share or $5,200 per contract (i.e. $52* 100 shares) on an investment of just $2,800. That is an 85.7% return on investment!

On the flip side, if the stock price stays at or above the Strike Price ($130), the investor loses all the money, i.e. $2,800 paid to buy the put option contract.

Step 7. Swipe up to Submit Order.

Check the Order Summary and if everything looks fine, swipe up to submit the order.

Check the Order Summary and if everything looks fine, swipe up to submit the order.

How to Buy an Out of The Money Put Option (OTM) on Robinhood

Continuing from steps 1-4 described above.

For the demo, we are buying 1 contract with a limit price of $25 per share. Our total cost of the order would be 1 contract * $25 per share * 100 shares per contract = $2,500.

Hit Review when ready.

Some Quick Math on the Long Put Option with Strike Price $125

The breakeven point of this put option contract would be $125 – $25 = $100. If Apple stock falls below the breakeven point, the investor makes profits. Technically with every dollar decrease below $100, the investor makes $100 (assuming the investor buys 1 contract of 100 shares). So, simply speaking, if the Apple stock falls to $50 before the expiry date (3/17/2023), the investor can make $100 – $50 = $50 profit per share or $5,000 per contract (i.e. $50* 100 shares) on an investment of just $2,500. That is 100% return on investment!

On the flip side, if the stock price stays at or above the Strike Price ($130), the investor loses all the money, i.e. $2,800 paid to buy the put option contract.

Is Buying a Long Put Option Risky?

Yes, Put Options carry asymmetric risk, i.e. on one side, if the stock goes below the breakeven point then you can get leveraged returns. Every dollar decrease in price below the breakeven point theoretically brings $100 in additional profits for the investor. On the flip side, in case the stock price remains above the strike price, the investor loses all the money paid to buy the put option.

Though, it’s worth noting that the investor doesn’t lose any more money even if the stock price skyrockets above the strike price. For him or her, the loss is capped at the premium paid for the put option contract. The loss is the same whether the stock stays at the strike price or grows 10x the strike price. This is a major advantage of buying a put option (vs shorting).

Conclusion

We Trust The Guide on ‘How to Buy a Long Put Option’ was Helpful.

Investing comes with financial risks. Options are leveraged financial instruments, and the risks (both gains and losses) are accentuated. As always, do your due diligence, understand the risks, and make informed investing decisions.

Happy investing!

For more on Stock Options, check out StartOptions.com