A long put strategy has limited [defined] risk and unlimited potential gains from moves down in the underlying price. When we say long we mean buying and holding. And to say that the risk is limited means we know the max loss is the cost of the put which is the premium paid.

A long put by itself is a bearish strategy. One way to apply it would be to buy it below major resistance such as a bid/ask spread. However, mind the IV Rank/Percentile (generally how expensive IV (implied volatility) is compared to how it was in the past). 

Going long on a put is a simple way to gain profits from exposure to movement in an underlying security, however the underlying security (such as a stock) must outperform the premium placed on that put by the options market. 

In other words, a long put must beat the options market in order to profit. The long put is bought with the expectation that it will outperform the price of its premium, which is what the options market is pricing in for the most likely bearish movement. There is also no reason to worry about needing to hold a put until expiration: a put can be closed at any time.

Intermediate: Understanding the Long Call’s Risk Graph

The risk profile of a long put reveals just what it means to say gains are unlimited. Below is an OTM (out-of-the-money) long put on SPY with a strike at 390. If the put expires with SPY over 390 then it becomes worthless with zero value, however this outcome does not get more severe if the SPY keeps moving up as far as 450 or even 500. The long put holder has a fixed max profit, but can still make an unlimited amount if there is an equally surprising move like that to the downside.

<Long OTM put at 21 delta and the 390 strike on SPY from IB’s Trader Workstation>

You can also see on this (or any other reputable options risk graph) that there is a dotted line and a solid line. The solid line is intrinsic value, which is what the price of the option would be if all time ran out or if implied volatility drops to zero. The dotted line is instantaneous PnL, which equates to intrinsic value plus extrinsic value; this is an extra premium that comes from implied volatility while there is still some time left in the option or option structure.

If closed early (well before expiration) then a long put must outpace the expected move (priced in by the options market) for a specific period of time. All long puts have long gamma and long vega but short theta. It is uncommon to exercise puts rather than simply close them for a profit, however a long put is frequently understood as a right to exercise (trade in the long put to be short 100 shares) if below the specified strike price.

Intermediate: Example

As an example, if held to expiration and a put is at the 90 strike and costs $8, then the put must expire with an underlying security below $82 for there to be a profit. Effectively, this premium value is what the options market is pricing in for the likely bearish movement. However, a put can be closed at any time (whether long or short), and does not need to wait for expiration. If closing early, the bearish movement must outperform what the options market is pricing in for that amount of time. 

One advantage of buying a put instead of shorting the underlying is that the max loss is the amount of the premium, known as the debit. This avoids the kind of tail risk that comes with shares and generally requires them to need a stop loss if not using options to hedge. Shorting shares can be even more dangerous than going long shares since that risk is unlimited if left unmanaged, which makes long puts particularly attractive to traders.

Effectively, the amount of the put’s debit (the total cost of opening it) serves as a special kind of stop loss which defines the risk, but one that will not shake the holder out of the position in an extreme move, as a normal stop loss would. And while the trading losses are limited in this way, the profit potential is unlimited if the underlying moves down dramatically. 

The effect of this, or holding long options in general, is that a trader can be much more tolerant of wide-ranging chop (if the underlying security is expected to break out sometime roughly over the next week or IV is expected to spike). On the other hand, most anyone who is short the underlying during violent chop is probably going to get stopped out.

Advanced: Price Sensitivity

Although these advantages of long options sound great, option buyers are aware of these benefits, and at times will pay too much for long puts. This is why it is important to be price sensitive to the value of options. One way to do that is to check how high IV (implied volatility) is compared to recent months, more specifically to check how steep the put skew (differences in implied volatility for different strikes on the same date) is for that contract. You can also check the IV rank or IV percentile of that security for a historical ranking of the relative price of IV, which is a way of assessing how expensive that security’s options are relative to other strikes. 

One specific strength of long puts is that when they are right about the underlying moving down sharply, often IV is increasing and therefore amplifying the value of the long puts. On the other side of the options spectrum, long calls generally instead tend to have an IV penalty when right about direction, since the IV crush that is usually associated with rallies will penalize the success of a call. Consequently, the options market knows this and usually charges relatively more for puts.

A put can also be modified into a vertical spread so as to gain a skew while also being more about direction than volatility. A trader can use a debit put vertical, which on most securities (especially index products) gives a trader an advantage by letting them buy at a higher IV and to write at a lower IV). 

However, as compared to a single leg option, a 1:1 vertical spread will also cap the profit potential. A long put can sometimes be a better choice than a vertical spread if the short put premium is far too small to be worthwhile for the put seller. Long puts are also attractive on severe rallies with the underlying security, which is when puts are usually selling at a strong discount.

Advanced: Gamma Scalping

Whenever a trader is long options, such as being long a put, then delta-hedging is done in an aggressive way for a benefit known as gamma scalping. If the underlying moves sharper than expected (in either direction) then gamma adjusts the directional exposure in a way which is favorable to the option holder. And then, by trading in the opposite direction of the market after the underlying security (stock) moves faster and further than the options market was pricing in, that advantage gets locked in. 

In the event that there was a sharp move up beyond what the options market was pricing in, then gamma will increase the directional exposure (increase the delta). For the put holder, this means that a higher directional exposure was enjoyed while being right about direction, just as if having more shares for that move. This profit can be locked in by buying some shares against the put. The precise way to do this is to buy the exact number of shares for how many deltas were increased by gamma.

On the other end of it, if there was a sharp move up beyond what the options market was expecting, then gamma decreases the directional exposure (decreases the delta) so that there was less damage. Selling shares after a drop like that locks in how there was less delta for the surprise rally. 

In the event that the position was delta-hedged at the open, such as being long a 30-delta put and also being long 30 shares, then a sharp move in either direction can be corrected with the underlying shares to lock in a profit. 

Expert: Synthetics

In this section, we discuss being long a put. If you want to flip your trade from bearish to bullish, you can buy 100 shares, and then you have the same relative exposure as a call. Whichever synthetic version includes trading out-of-the-money options is usually the most profitable to trade since there would be lower transaction costs from a tighter bid/ask spread.

If the put is delta-hedged from the open, then synthetically this is like being long a straddle since it benefits equally from a very sharp move in either direction.

bearish: A trade is bearish if it would profit from a decrease in the underlying (e.g. stock or future) price. Likewise, a trade thesis is bearish if it is expecting the underlying to decrease.

bid/ask spread: The bid is the highest price buyers are willing to pay for a security, and the ask is the lowest price that sellers are willing to sell a security. The difference between these prices is the bid/ask spread. Highly liquid securities (having many active buyers and sellers) such as SPY usually have a bid/ask spread of only one cent, even in the premarket and postmarket. Examining the width of the bid/ask spread can be a more reliable way to gauge option liquidity than volume or OI.

Call Wall: The Call Wall is the strike with the largest net call gamma. This shows us what the top of the probable trading range is (the upper bound).

defined risk: In an option strategy, if risk is defined then it is structured so that it has a max loss (capped total loss on a trade) rather than potentially unlimited loss.

delta: A first-order Greek that measures the sensitivity of an option's price to directional movement in the underlying security. Factoring out nonlinear dynamics, the instantaneous value of one delta is worth one share of a stock. This means that if the option on a stock is 40 delta, such as a 40 delta long call or a 40 delta short put, then instantaneously it has the same profit/loss dynamics of being long 40 shares. 

extrinsic value: Extrinsic value is the time premium of an option which disappears gradually as its contract approaches expiration. It is the price for optionality that option buyers are willing to pay for a chance at a stake in the unknown. As implied volatility increases, so does extrinsic value. Out-of-the-money options entirely consist of extrinsic value. 

gamma: A second-order Greek which compares changes in delta (directional exposure) to changes in the underlying. In general, gamma means the acceleration of directional exposure. Gamma is also one of the main properties of an option: All long options are long gamma. In a way, gamma is thought of as the magic of options because the size of directional exposure (delta) increases as it is right about direction (therefore increasing profits), and it decreases when it is wrong about direction (therefore decreasing losses). But the cost for this magic is time decay. The connection to market makers is that when they are long gamma (market gamma is positive) then they trade against the direction of the trend to lock in profits after they have favorable moves with increased size thanks to gamma. This is why positive market gamma tends to create an environment of reduced or reducing realized volatility (smaller overall price moves).

gamma scalp: Gamma scalping is delta-hedging for a profit while net positive in gamma. A portfolio is net long in gamma (accelerating directional exposure) when it is more heavily allocated in long options than short options. By delta-hedging against the flow of a stock after sharp and favorable moves, it reduces directional exposure after just having a winning streak with more size. This is how gamma-scalping can be a way to lock in profits while also reducing risk.

Greeks: An option Greek is a type of risk metric that compares the change in one thing to a change in the other. A first-order Greek is the change in one thing compared to a change in the price of an option. The major first-order Greeks are delta (sensitivity to direction), vega (sensitivity to implied volatility), and theta (sensitivity to time decay). 

hedge: To hedge is to set up precautionary or defensive measures which partially compensate against heavy losses or limit further losses. A well-designed hedge is asymmetrical to the larger position it is protecting—in a way that it suddenly increases in size if the larger position takes on losses. A hedge does not aim at being perfect and would generally be content near a limit of recovering a portion of the losses from what it is protecting.

instantaneous PnL: The real-time profit or loss associated with an options position. On the risk chart for an option, this is the smooth and curved line. What instantaneous PnL shows is how much profit or loss would be available if the position was closed immediately.

intrinsic value: An option has intrinsic value if it is in-the-money, which means that if the option expired with the underlying security at its current price, then there would still be some value. Intrinsic value is only a matter of how much the strike price is beating the underlying price by. It has nothing to do with implied volatility.

IV (implied volatility): The expected percentage range over a year with 68.3% confidence. This is based on options pricing at one standard deviation. Long options benefit from increases in implied volatility and short options benefit from decreases in implied volatility. In general, when implied volatility increases it means that the expected percentage range is getting larger. When implied volatility is applied to lengths of time other than one year, then this is called the expected move.

IV crush: A sharp drop in implied volatility which causes the price of an option to deflate. Short options benefit from IV crush and long options lose value from IV crush.

OTM (out-of-the-money): An option is out-of-the-money if it would have zero value expiring with the underlying at its current price. When an option is out-of-the-money, its entire price is made of extrinsic value, which is a premium that option buyers are willing to pay for an opportunity to make a profit.

security: Any investment product that can be traded on an exchange, such as but not limited to stocks, futures, ETFs, options, bonds, mutual funds, and treasuries. 

skew: Volatility skew is the difference between implied volatility amounts of different options strikes on the same date. Implied volatility is the expected percentage range over one year–based on option prices–with 68.3% confidence. Skew is one of the main edges to look for in an options trade, especially on vertical spreads (all options are on the same date). Sometimes it is a penalty dragging down a good trade, but it is nonetheless important to understand the extent of how much it can challenge a trade if knowingly accepting to take the opposite side of a skew advantage.

SPY: This is the largest ETF (exchange traded fund) and represents the S&P 500. As an ETF, it can be traded just like a stock. This represents nearly the 500 largest and most successful US companies that are publicly traded. Often when someone asks how the market is doing, you can answer by telling them how SPY is doing. The S&P 500 is also the most common baseline for other funds to be compared to, either in performance or as a measure of beta (relative correlation and percentage range).

stop loss: In trading, a stop loss is a predefined exit point to close a trade at a max loss if the trade goes badly. Stop losses, unless otherwise specified, are market orders, which means they can transact at a worse point than expected if the underlying is moving fast or it is illiquid (lacking a high amount of buyers and sellers).

straddle: A vertical option strategy which is long a call and long a put at the same strike (long straddle) or that is short a put and short a call at the same strike (short straddle). For retail traders, this is arguably the cleanest way to trade volatility (changes in the percentage range of a security) directly.

strike: The price that an option is based on. A long call will expire worthless if the price of the underlying security finishes underneath the strike price, and a long put will expire worthless if the underlying finishes above the strike price.

theta: The measurement of how much an option's price changes relative to time. Often used to mean time decay, theta gets stronger in an accelerated fashion as the time of an option runs out. If long an option, then time decay causes net losses (unless more is earned from increases in implied volatility or sharp and favorable price movements). And if short an option, then time decay causes net profits (unless more is lost from increases in implied volatility or sharp and unfavorable price movements).

underlying: A reference to the immediate price of the underlying security. This is also sometimes called spot (the spot price of the underlying). The spot price is in contrast to derivatives which have option prices or [forward] futures prices.

vega: A first-order Greek which measures the sensitivity of an option to changes in implied volatility (the expected percentage range based on option prices with 68.3% confidence). When we say extrinsic value, this pertains directly to vega and theta (the sensitivity of an option to time decay). As options run out of time on the contract, vega decreases. This is why we often see short duration options with very high implied volatility amounts: the higher implied volatility is balanced out by a smaller slice of vega, which is the influence of implied volatility on the price of an option.

vertical spread: Any option strategy which has all contracts expiring on the same date. In contrast to a horizontal spread (calendar) or diagonal spread (combination of vertical and horizontal strikes), vertical spreads are usually the most directional and also the easiest to manage. With vertical strategies, the main edge at play is usually skew (differences in implied volatility for different strikes on the same date). Implied volatility is the expected percentage range over the next year—based on option prices—with 68.3% confidence.