Buying a Put is the opposite of buying a Call. When you buy a Call, you are bullish about the stock/index. When an investor is bearish, he can buy a Put option.
A Put Option gives the buyer of the Put a right to sell the stock (to the Put seller) at a pre-specified price and thereby limits risk.
A long Put is a bearish strategy. An investor can buy Put options to take advantage of a falling market.
When to use: Investor is bearish about the stock/index i.e. the investor feels that there is a risk that the prices of the stock are going to fall in the future.
Risk: Limited to the amount of Premium paid—maximum loss if stock/index price expires at or above the option strike price.
Reward: Unlimited.
Break-even Point: Stock Price-Premium
Example:
Mr. XYZ is feeling bearish about Nifty on June 24, when the Nifty is at 2694. He buys a Put option with a strike price Rs. 2600 at a premium of Rs. 52, expiring on July 31. If the Nifty goes below 2548, Mrs. XYZ will make a profit on exercising the option. In case the Nifty rises above 2600, he can forego the option (it will expire worthless) with a maximum loss of the premium.
A bearish investor can profit from declining stock prices by buying Puts. She/he limits his risk to the amount of premium paid but his profit potential remains unlimited. This is one of the widely used strategies when an investor is bearish.
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