The index long put is the simplest strategy to use in index options trading and the implementation involves the purchase of an index put option.
Buy 1 put.
The options trader employing the index Long Put strategy believes that the underlying index level will fall significantly below the put strike price within a certain period of time.
Finite profit potential
For a conventional nonnegative equity index, the put’s profit is bounded by an index settlement value of zero. In this example, maximum profit is (400 − 4) × $100 = $39,600 before costs.
Strike price minus the premium paid, if the stock falls to zero.
Limited Risk
Risk for the index Long Put strategy is capped and is equal to the price paid for the index put option no matter how high the index is trading on expiration date.
Breakeven Point(s)
Strike price minus the premium paid, provided the result is zero or above.
Example
XYZ Index is a broad based index representative of the entire stock market and its value in June is 400. Believing that the broader market will retreat in the near future, an options trader purchases an six-month XYZ index put with a strike of 400 index points expiring in December for a premium of 4.00 index points. With a contract multiplier of $100, the cost of the index put option comes to $400.
Suppose XYZ Index dropped to 380 in December and the trader's DEC 400 XYZ index put expires in-the-money. At settlement value of 380, the DEC 400 XYZ index put option will have an intrinsic value of 20 index points and exercising this option will give the trader a settlement amount of $2000 (20 points × $100 per point). Taking into account the cost of the option itself, which is $400, the trader's net profit comes to $1600.
Suppose XYZ Index went up to 420 in December and the trader's DEC 400 XYZ index put expires out-of-the-money. At settlement value of 420, the DEC 400 XYZ index put option will expire worthless with zero intrinsic value. The trader's net loss is equal to the amount paid for the index put option which is $400.
Commissions
For ease of understanding, these examples exclude commissions, fees and financing costs. Include all costs when comparing an actual position; there is no universal commission amount.
For active traders, transaction costs can consume a significant part of returns. Compare the full commission and fee schedule, exercise and assignment charges, and bid-ask spreads. The cost of entering and closing every leg matters.
Out-of-the-money Index Puts
Going long on out-of-the-money puts maybe cheaper but the put options have higher risk of expiring worthless.
In-the-money Index Puts
In-the-money options include intrinsic value and generally cost more than comparable out-of-the-money options of the same type and expiration. Compare premium minus intrinsic value directly; less time value is not guaranteed in every comparison.
Portfolio Insurance
Index puts can also be used to protect a portfolio against a declining market without the need to liquidate any stock while at the same time enable the portfolio to participate and benefit from a rising market.
Amounts are in index points before fees. Multiply by the contract multiplier to convert them to money. If a maximum profit or loss calculation gives a negative amount, use zero. These figures assume matching contracts held to expiration and do not include financing or early assignment.
Before expiration and assignment
The diagrams and worked outcomes describe expiration payoffs, not an option’s market price before expiration. Time decay, implied volatility, rates, dividends and bid-ask spreads affect early closing values. American-style short options can be assigned early; a protective long option is not automatically exercised when a short leg is assigned. Closing or exercising one leg can change the remaining position’s risk.
Index points, settlement and hedge limits
The XYZ Index and its quotes are hypothetical. These examples assume a cash-settled contract with a $100-per-point multiplier. Use the official final settlement value, not an earlier index quote. The selected contract determines last trading time, exercise style and settlement procedure; some index options allow early exercise and others do not.
An index put can hedge market exposure, but a portfolio may not track the index exactly. Quantity, beta, timing, premium and basis risk affect protection. Cash settlement does not deliver the constituent shares. See the current index market guide.
