Long Put vs. Long Put Spread: Which Should You Play?

How to determine whether you should use a long put or a long put spread

Oct 1, 2015 at 12:03 PM
    facebook X logo linkedin

    The long put and long put spread are both bearish options strategies that profit when the underlying stock declines. So, why would a trader opt to play a long put spread instead of a long put -- or vice versa? Let's look at the pros and cons of each approach.

    When buying a long put, there's only one option involved. You buy a put, and then collect your profit if the underlying security falls below the strike price prior to expiration. The initial cost to purchase the put is your maximum potential loss, while gains are equivalent to the strike price of the option, less the net debit. Likewise, the at-expiration breakeven point can be calculated by subtracting the net debit from the strike price of the option.

    On the plus side, there's only one leg of the trade to manage, which simplifies your strategy and keeps brokerage costs to a minimum. Plus, profits on a purchased put are limited only by theoretical "support at zero" -- as long as the stock keeps falling, you can keep profiting.

    A long put spread, meanwhile, involves the sale of an additional put option at a lower strike. By selling this option, you'll receive a premium upfront, which should offset a portion of the cost of your purchased put option. This effectively lowers your initial net debit -- and, by extension, your maximum possible risk and breakeven point on the play.

    On the other hand, the fact that you're playing a two-legged spread may result in additional brokerage fees. Plus, your maximum potential profit on a long put spread is limited to the difference between the two strike prices, less the initial net debit.

    In summary: A long put offers a greater profit potential, but carries a higher risk and breakeven point. On the other hand, a long put spread reduces your net debit and breakeven, but also caps your potential gains.

    If you have a specific downside target in mind for the stock -- perhaps a historically supportive level on the charts -- you might prefer to implement a long put spread, wherein your sold strike aligns with this expected floor. On the other hand, if you're anticipating an extended decline or a particularly dramatic sell-off, you could opt to ramp up your profit potential by rolling with a solitary long put.



    How to collect 1 dividend check every day for LIFE

    Did you know you could collect 1 dividend check every day the market is open? You could also do it starting with just $605! For me, I'm collecting 70 dividend checks every quarter…which averages around 1.1 dividend checks every business day. There's no trading behind this... no penny stocks or high-risk investments. All you do is buy and hold and you're set. There's no set up required either. If you start buying the dividend stocks I show you today... you could collect 1 dividend per day starting as early as this week. Click here for all the details.