Long or 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 his risk.
A long Put is a bearish strategy. To take advantage of a falling market an investor can buy Put options.
When to use: Investor is bearish about the stock/index.
Risk: Limited to the amount of premium paid. (Maximum loss if stock/index expires at or above the option strike price).
Reward: Unlimited
Break-even Point: Stock price - premium
Example:
Mr. XYZ is bearish on Nifty on 24th June, when the Nifty is at ₹2694. He buys a Put option with a strike price of ₹2600 at a premium of ₹52, expiring on 31st July. If the Nifty goes below ₹2548, Mr. XYZ will make a profit on exercising the option. In case the Nifty rises above ₹2600, he can forego the option (it will expire worthlessly) with a maximum loss of the premium.
Analysis: A bearish investor can profit from declining stock prices by buying Puts. 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.