If you’re interested in bear market strategies, buying long puts is an alternative to selling short. Learn more about how this limited-risk options strategy works.
Buying puts can be an effective strategy that may help protect your assets or provide a profit in a bear market. If the price of the stock drops below the strike price of the option, you may be able to sell your contract for more than you paid for it, or, if you own shares of the same stock, you can exercise your put and sell them at the strike price for more than market value. Even if the price rises instead of declining, you can either do nothing and let the option expire and hold onto your shares, losing the premium you paid for the option; or you may sell it to prior to expiration to recover part of your purchase price.
An advantage is that buying puts limits your risk versus selling short. If you sell short, you must borrow shares on margin, which is much more expensive than buying a put. Furthermore, you face unlimited risk when you sell short, as the price of a stock can theoretically rise indefinitely, potentially forcing you to repurchase at a much higher price than the price at which you sold the shares. The maximum loss you face when you purchase a put, on the other hand, is the amount of the premium.
Long Put Graph
In the graph shown here, the vertical (Y-axis) represents profit and loss, while the horizontal (X-axis) shows the price of the underlying stock. The blue line shows your potential profit or loss given the price of the underlying.