Compare Strategies:

Short Put Options Trading Strategy Explained

Published on Tuesday, April 17, 2018 | Modified on Wednesday, July 10, 2019

Short Put

Short Put Options Strategy

Strategy LevelBeginners
Instruments TradedPut
Number of Positions1
Market ViewBullish
Risk ProfileUnlimited
Reward ProfileLimited
Breakeven PointStrike 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 ₹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 trade. However, if the price of the underlying moves below 1000 then you will incur unlimited losses.

When to use Short Put strategy?

Short Put works well when you're Bullish that the price of the underlying will not fall beyond a certain level.

Example

Example 1 - Bank Nifty

Sell 1 Put Option of Bank Nifty
Bank NiftySpot Price ₹8900
Lot Size: 1 contract = 25Strike Price ₹8800
Premium ₹400
Breakeven ₹
(Strike Price - Premium)
8400
Scenarios
Bank Nifty on expiry ₹Premium Pay-off ₹
(Premium * Lot Size)
Exercise Pay-off ₹
(Expiry Price - Strike Price) * Lot Size
Net Pay-off ₹
(Exercise + Premium Payoff)
800010000-20000-10000
820010000-15000-5000
840010000-100000
860010000-50005000
880010000010000
9000100000**10000

** Exercise pay-off is considered 0 if it reaches above 0.

short put options strategy bank nifty

Example 2 - NIFTY OPTIONS

Suppose you are bullish on Nifty when it is at ₹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 ₹10,300 at a premium of 125 expiring on 31st July. If Nifty stays above ₹10,300, you will be in profit and retain the premium. In case the Nifty falls, you will incur unlimited losses.

Sell 1 Put Option of Nifty
Current Bank Nifty (Spot Price)₹10,400
Strike Price of Call Option₹10,300
Premium Paid₹125
Break Even Point (Strike Price - Premium)₹10,175
Lot Size75
Total Premium Paid₹9,375
Short Put Strategy Payoff Schedule
Bank Nifty on Expiry (₹)Net Payoff (₹)
(Spot Price - Break Even Point)
9,700-35625.00
9,900-20625.00
10,100-5625.00
10,1750.00
10,4009,375.00
10,6009,375.00
10,8009,375.00

Note: Break Even Point is 10,175. The maximum profit earn cannot be greater than ₹9,375 premium paid.

short put strategy example nifty

Market View - Bullish

When you are expecting the price or volatility of the underlying to increase marginally.

Actions

  • Sell Put Option

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.

Breakeven Point

Strike Price - Premium

Risk Profile of Short Put

Unlimited

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.

Reward Profile of Short Put

Limited

The profit is limited to premium received in your account when you sell the Put Option.

Max Profit Scenario of Short Put

Underlying doesn't go down and options remain exercised.

Max Loss Scenario of Short Put

Underlying goes down and options remain exercised.

Advantage of Short Put

It allows you benefit from time decay. And earn income in a rising or range bound market scenario.

Disadvantage of Short Put

It is a high risk strategy and may cause huge losses if the price of the underlying falls steeply.

How to exit?

  • Buy the Put and book profit.
  • Wait for the Put to expire and retain the premium.

Simillar Strategies

Bull Put Spread, Covered Call, Short Straddle


Comments

No comments found. Be the first to post a comment.








Search Chittorgarh.com:

Download Our Mobile App

Android App iOS App