Long Put
Because you think the price of an asset is going down.
The payoff graph of a long put position is below:
Let’s re-run the three scenarios described in the previous section, this time comparing the purchase of the JAG June 30th 90 strike put for \$5, against short selling one JAG token. Reiterating, the scenarios are:
1. 1.
The price of JAG rises to \$130
2. 2.
The price of JAG remains at \$100
3. 3.
The price of JAG falls to \$70
Scenario 1:
• If Alice had short sold one JAG for \$100, she'd lose \$30 (-30%).
• If she had bought the put, she would lose the \$5 premium as the asset price is greater than the strike price (-100%).
Scenario 2:
• If Alice had short sold one JAG for \$100, she would remain flat.
• If she had bought the put, she would lose the \$5 premium paid for the put (-100%).
Scenario 3:
• If Alice had short sold one JAG for \$100, she'd make \$30 (+30%)
• If she had bought the put, she could exercise the put to sell JAG at \$90 and buy it back for \$70. After factoring in the put premium, this is a profit of \$15 (+300%).
Why trade it? You think the asset is going down within a certain time frame.
Optimal conditions? Cheap volatility, bearish asset.
Example: Buy 10x September 100 Put for \$5.
Cost: The premium you pay, in this example 10 x \$5 = \$50.
Theoretical Max Profit: If the asset goes to zero, you make the difference between the strike and zero, minus the premium you paid, (100 - \$5) x 10 = \$950.
Theoretical Max Loss: The price you paid for the put, in this example \$50.
Breakeven at expiration: The strike minus the price you paid for the put (100 - \$5 = \$95).