Buying Puts – Playing a Bear Market
The speculative purchase of put options is the simplest way for traders to use option contracts to benefit from a decline in value of the underlying stock. Put options are one of the building blocks of many more sophisticated options strategies.
In this level will address the particular use of the long put as a speculative, bearish strategy.
Although put options may be exercised by its owner at any time up until the last trading day for the contract, and underlying shares sold, speculative put buyers generally expect to sell them for a realized profit at some point before they expire.
The speculative long put option is a directional strategy. Profits are realized when the investor is successful in picking stocks that decrease in value.
In this course, we only refer to the speculative use of the long put option, but you should know that many investors choose to use put contracts to protect the value of an equivalent number of underlying shares they own. The put option owner has a guaranteed selling price which is the strike price, and that is why they are commonly used to hedge an underlying stock position.