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What is a Long Put?

 

Summary description: The holder of the put has the right to sell a certain quantity of the underlying instrument (share) at a certain price.
Price expectation: falling prices and increasing price fluctuations
Profit potential: almost unlimited (theoretically limited to the underlying share price dropping to zero, minus the premium invested)
Loss potential: premium invested

 

The chapters on option pricing explain why options become more expensive when price fluctuations increase, and why buyers of calls and puts benefit from this development.

Example:

Purchase of a put on a share with an exercise price of EUR 100 at a premium of EUR 3.

When the option expires in the future, profits and losses will be incurred given the following different share price scenarios:

Share price upon expiration of the option Profit and loss on the long put
120 -3 (invested premium)
110 -3 (invested premium)
104 -3 (invested premium)
100 -3 (invested premium)
95 +2 (+5 - 3 invested premium)
80 +17 (+20 - 3 invested premium)

The put expires worthless when prices increase. Profits are made at a price of 97 (the break-even point) - when prices fall.

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