Zerodha (Trading & Demat Account)
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Flat ₹20/trade Intra-day/F&O
Zerodha (Trading & Demat Account)
FREE Equity Delivery and MF
Flat ₹20/trade Intra-day/F&O
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Published on Tuesday, April 17, 2018 | Modified on Wednesday, July 10, 2019
| Strategy Level | Beginners |
| Instruments Traded | Put |
| Number of Positions | 1 |
| Market View | Bullish |
| Risk Profile | Unlimited |
| Reward Profile | Limited |
| Breakeven Point | Strike Price - Premium |
A short put is another Bullish trading strategy wherein your view is that the price of an underlying will not move below a certain level. The strategy involves entering into a single position of selling a Put Option. It has low profit potential and is exposed to unlimited risk.
A short put strategy involves selling a Put Option only. For example if you see that the shares of a Company A will not move below Rs 1000 then you sell the Put Option of that stock at Rs 1000 and receive the premium amount. The premium received will be the maximum profit you can earn from this trade. However, if the price of the underlying moves below 1000 then you will incur unlimited losses.
Short Put works well when you're Bullish that the price of the underlying will not fall beyond a certain level.
| Bank Nifty | Spot Price Rs | 8900 |
| Lot Size: 1 contract = 25 | Strike Price Rs | 8800 |
| Premium Rs | 400 | |
| Breakeven Rs (Strike Price - Premium) | 8400 |
| Bank Nifty on expiry Rs | Premium Pay-off Rs (Premium * Lot Size) | Exercise Pay-off Rs (Expiry Price - Strike Price) * Lot Size | Net Pay-off Rs (Exercise + Premium Payoff) |
|---|---|---|---|
| 8000 | 10000 | -20000 | -10000 |
| 8200 | 10000 | -15000 | -5000 |
| 8400 | 10000 | -10000 | 0 |
| 8600 | 10000 | -5000 | 5000 |
| 8800 | 10000 | 0 | 10000 |
| 9000 | 10000 | 0** | 10000 |
** Exercise pay-off is considered 0 if it reaches above 0.
Suppose you are bullish on Nifty when it is at Rs 10,400. To benefit from the market scenario, you can implement Short Put option strategy by selling a Put option with a strike price of Rs 10,300 at a premium of 125 expiring on 31st July. If Nifty stays above Rs 10,300, you will be in profit and retain the premium. In case the Nifty falls, you will incur unlimited losses.
| Current Bank Nifty (Spot Price) | Rs 10,400 |
| Strike Price of Call Option | Rs 10,300 |
| Premium Paid | Rs 125 |
| Break Even Point (Strike Price - Premium) | Rs 10,175 |
| Lot Size | 75 |
| Total Premium Paid | Rs 9,375 |
| Bank Nifty on Expiry (Rs ) | Net Payoff (Rs ) (Spot Price - Break Even Point) |
|---|---|
| 9,700 | -35625.00 |
| 9,900 | -20625.00 |
| 10,100 | -5625.00 |
| 10,175 | 0.00 |
| 10,400 | 9,375.00 |
| 10,600 | 9,375.00 |
| 10,800 | 9,375.00 |
Note: Break Even Point is 10,175. The maximum profit earn cannot be greater than Rs 9,375 premium paid.
When you are expecting the price or volatility of the underlying to increase marginally.
A short put strategy involves selling a Put Option only. So if you see that the shares of a Company A will not move below a 1000 then you sell the Put Option of that stock at 1000 and receive the premium amount. The premium received will be the maximum profit you can earn from this deal. However, if the price of the underlying moves below 1000 than you will incur losses.
Strike Price - Premium
There is no limit to losses incurred in the trade. The risk is when the price of the underlying falls, and the Put is exercised. You are then obliged to buy the underlying at the strike price.
The profit is limited to premium received in your account when you sell the Put Option.
Underlying doesn't go down and options remain exercised.
Underlying goes down and options remain exercised.
It allows you benefit from time decay. And earn income in a rising or range bound market scenario.
It is a high risk strategy and may cause huge losses if the price of the underlying falls steeply.
Bull Put Spread, Covered Call, Short Straddle
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