If you already read our blog about long calls here, you’ll be able to easily understand how long puts work since they are similar in many ways.
However, let’s focus on how they are different. The biggest difference between these two option trades is that when you buy a put, you’re bearish, rather than bullish, on the underlying stock.
Just like with long calls, there is a someone on the buying side of the contract and someone on the selling side of the contract. The buyer of the put option wants the underlying stock to go down as much as possible before the expiration date while the seller of the put option wants the underlying stock to go up as much as possible before the expiration date.
Your maximum profit is unlimited when buying a put while your maximum loss is the premium you paid to the seller to buy the contract.
Buying a put is equivalent to “shorting” a stock. Rather than short selling the underlying shares, you can simply buy puts on the stock to profit off of the drop in price.