Long Put Vs Short Put Options Trading Strategy Comparison

A long put option strategy works well when you're expecting the underlying asset to sharply decline or be volatile in near future.

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

When you are expecting a drop in the price of the underlying and rise in the volatility.

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

• Buy Put Option

Let's assume you're Bearish on Nifty currently trading at 10,400. You expect it to fall to 10,000 level. You buy a Put option with a strike price 10,000. If the Nifty goes below 10,000, you will make a profit on exercising the option. In case the Nifty rises contrary to expectation, you will incur a maximum loss of the premium.

• 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.

The breakeven is achieved when the strike price of the Put Option is equal to the premium paid.

The risk for this strategy is limited to the premium paid for the Put Option. Maximum loss will happen when price of underlying is greater than strike price of the Put option.

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.

This strategy has the potential to earn unlimited profit. The profit will depend on how low the price of the underlying drops.

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

Underlying goes down and Option exercised

• Maximum Profit = Unlimited
• Maximum Profit Achieved When Price of Underlying = 0
• Profit = Strike Price of Long Put - Premium Paid

Underlying doesn't go down and options remain exercised.

Underlying goes up and Option not exercised

• Max Loss = Premium Paid + Commissions Paid
• Max Loss Occurs When Price of Underlying >= Strike Price of Long Put

Underlying goes down and options remain exercised.

Unlimited profit potential with risk only limited to loss of premium.

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

You may incur 100% loss in premium if the underlying price rises.

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