Hey Friends. So today finally we will discuss “Short Put Strategy”
– last of the simplest options strategies. Tomorrow onwards we will
start with more advanced and complex, but more interesting strategies.
We can use a Short Put Strategy when we
are bullish in the market or a particular type of underlying and we
expect the prices to rise. 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.
Though the strategy is very simple and
easy to understand, execute and profitable, please remember that this
strategy has unlimited risk compared to very limited profits.
When can we use this strategy??
We can use this strategy when we are
bullish about a particular stock or index. The reason for using this
strategy is that there is a high probability for success when selling
very out-of-the-money Put Options.
Risk involved while using this strategy
Unlimited Risk is involved if the index or stock tumbles down
Benefits of using the strategy
Limited profits. Maximum profit will be the premium at the time of writing (selling) the Put
When can we achieve the breakeven?
The break-even point for us will be Strike Price – Premium
NIFTY is currently trading around 8300.
Let’s assume you are extremely bullish on NIFTY. So you sell one lot of
current month Put with 8000 strike price at a premium of Rs. 50.
If the Nifty remains above 8000, the put
option will not be exercised by you and you will be able to retain the
premium or Rs. 50 x The Lot Size. In case the Nifty falls below 8000,
you may incur an unlimited loss.
The Analysis of the Strategy
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 (Rs. 50 in this case) 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.