Hi Friends. In the previous post we discussed the Strategy – Short Call.
In it we focused on taking the advantage of the slide in the prices of
the undertaking. It was a good strategy for fall in the prices, but with
a disadvantage – unlimited loss compared with limited profits.
Today we will discuss a strategy, where we will again try to take
advantage of the falling prices of the underlying. But in this strategy,
there is a potential of unlimited profit compared to limited loss.
So let’s understand today’s strategy –
Long Put
The Long Put strategy is a simple option trading strategy. In this
strategy, the options trader who buys a put option, believes that the
price of the underlying security will fall significantly beyond the
strike price before the Options contract expires.
This strategy is for aggressive traders who are extremely bearish on
the stock / index and want to exploit the perceived downside trend with
limited risk of loss.
When can we use this strategy??
We can use this strategy when we are extremely bearish on a stock or index
Risk involved while using this strategy
Risk is minimal and is only limited to the premium at which we
purchased the Put. The maximum loss that we can incur is the loss of the
premium.
Benefits of using the strategy
Unlimited profits as the stock or index can fall to any level before the expiry.
When can we achieve the breakeven?
The break-even point for us will be Strike Price – Premium
Example
NIFTY is currently trading around 8400. Let’s assume you are
extremely bearish on NIFTY. So you buy one lot of current month Put with
8300 strike price for a premium of Rs. 90.
If the Nifty goes below 8300, you will make a net profit (after
deducting the premium) on exercising the option. In case the Nifty stays
above 8300, it will expire worthless and you will make a maximum loss
of the premium of Rs. 90
The Analysis of the Strategy
The Long Put strategy limits the risk of the loss to the premium paid by us for a particular Put option (Rs. 90 in our case).
But the potential to earn profits is unlimited if the Nifty falls
beyond 8300 strike price. This strategy is the simplest way to earn
money if you believe that the market will move southwards.