Long put in options leverage
A long put option could also be used to hedge a long stock position. To achieve higher returns in the stock market, besides doing more homework on thecompanies you wish to buy, it is often necessary totake on higher risk. A mostcommon way to do that is to buy stocks on margin.Buying on margin lets the investoruse stocks as collateral to borrow money to buy more stock. Currently, investorscan borrow up to half the value of the stock they wish to purchase.
Your brokergladly loans you as much money as you put up, and charges you a very attractiveinterest rate. That amount will onlyallow you to buy 200 shares. Long Put ConstructionBuy 1 ATM PutPut Buying vs. Short SellingCompared to short selling the stock, it is more convenient to bet against a stock by purchasing put options as the investor does not have to borrow the stock to short. Additionally, the risk is capped to the premium paid for the put options, as opposed to unlimited risk when short selling the underlying stock outright.However, put options have a limited lifespan.
DescriptionThe investor buys a put contract that is compatible with the expected timing and size of a downturn.