Options Trading Strategies Short Put

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Options Trading Strategies

Short Put

Writing Put Option

A trader will short put if he is bullish in nature and expects the underlying asset not to fall below a certain level. In this strategy we sell the Put in the assumption that the underlying will move in an upward direction. This position offers limited profit potential and the possibility of unlimited losses in case the rates of the underlying fall significantly.

A short put is best used when you expect the underlying asset to rise moderately. It would still benefit if the underlying asset remains at the same level, because the time decay factor will always be in your favour as the time value of put will reduce over a period of time as you reach near to expiry.

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Short Put strategy is very simple and easy to understand, execute and profitable, please remember that this strategy has unlimited risk compared to very limited profits.

For every long put option buyer, there is a corresponding put option “writer” or seller. If you have written the put option, then you receive the premium in return for the accepting the risk that you may need to buy a futures contract at a higher price than the current market price for that future.

If you firmly believe the market is not going down. Sell out-of-the-money (lower strike) options if you are only somewhat convinced, sell at-the-money options if you are very confident the market will stagnate or rise.

We use this strategy when we highly expect a rise in the price of the underlying. But this is a risky strategy as our profits are extremely limited but the losses are unlimited as we tend to lose a lot of money if the underlying index or stock keeps falling down.

Therefore this strategy should either be used when we are certain that the prices of underlying will go up or with a stop loss.

Benefits of using the strategy is limited profits. Maximum profit will be the premium at the time of writing (selling) the Put.

Risk: Losses will be potentially unlimited if the stock skyrockets above the strike price of put.

Reward: His maximum profits will be premium amount received.

Breakeven: The break-even point will be Strike Price – Premium.

Short Put Example

Here’s a look at the profit and loss (PnL) diagram of a short put option contract.

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NIFTY is trading at 11300 levels and Mr. G is bullish on the market. He expects NIFTY to stay near 11300 to 11500 levels or even rise further until expiry.

Mr G sells one NIFTY 11300 Put Option for a premium of Rs. 131. The lot size of NIFTY is 75. Mr. G’s account credited by Rs. 9,825 (131*75) which is the premium received on sale of Put option.

Breakeven: The break-even point will be 11169 (11300-131).

Case 1: If the NIFTY closes at 11300 or above, then Mr. G will receive the maximum profit of Rs. 9,825 as same premium received on sale of put option.