7. Long Put

Scenario:

Pork Bellies have been trading at contract highs of between 75 and 85 cents per pound. The trader feels that a major decline is very likely. However, the trader is not sure when it will come. He decides to buy a long-term put option. By doing this he initially has very little time decay. He can ride out a temporary upward move and still be in for the big break.

Specifics:
Underlying Futures Contract:	February Pork Bellies
Futures Price Level:	80.15
Days to Futures Expiration:	210
Days to Options Expiration:	180
Option Implied Volatility:	33.2%
Option Position:	Long 1 Feb 76 Put	- 5.10 ($2040)

At Expiration:
Breakeven:	70.90 (76.00 strike - 5.10 premium)
Loss Risk:	Limited to the premium paid. Loss above 70.90 with maximum loss of 5.10 above 76.00.
Potential Gain:	Unlimited, with profits increasing as the futures fall further and further past 70.90 breakeven.

Things to Watch:

This trader must be very bearish, with volatility increasing, to make this trade profitable. If held to expiration, the futures would have to fall more than 10% by expiration just to break even. Check the follow-up strategies if the futures fall or volatility rises to the levels expected before expiration.

Follow-up Trading Strategies