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Short Put Option Trading Strategy Explained

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

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.

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

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

Example 2 - NIFTY OPTIONS

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.

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

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

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

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