SHORT PUT
Selling a Put is opposite of buying a Put. An
investor buys Put when he is bearish on a stock. An investor Sells Put when he
is Bullish about the stock – expects the stock price to rise or stay
sideways at the minimum. When you sell a Put, you earn a Premium (from the
buyer of the Put). You have sold someone the right to sell you the stock at
the strike price. If the stock price increases beyond the strike price, the
short put position will make a profit for the seller by the amount of the
premium, since the buyer will not exercise the Put option and the Put seller
can retain the Premium (which is his maximum profit). But, if the stock price
decreases below the strike price, by more than the amount of the premium, the
Put seller will lose money. The potential loss being unlimited (until the stock
price fall to zero).
When to Use: Investor is very Bullish on the stock / index. The main
idea is to make a short term income.
Risk: Put
Strike Price –
Put Premium.
Reward: Limited
to the amount of Premium received.
Breakeven:
Put Strike
Price - Premium
Example
Mr. XYZ is
bullish on Nifty when it is at 4191.10. He sells a Put option with a strike
price of Rs. 4100 at a premium of Rs. 170.50 expiring on 31st July. If the Nifty index stays above 4100, he will gain the amount of
premium as the Put buyer won’t exercise his option. In case the Nifty falls
below 4100, Put buyer will exercise the option and the Mr. XYZ will start
losing money. If the Nifty falls below 3929.50, which is the breakeven point,
Mr. XYZ will lose the premium and more depending on the extent of the fall in
Nifty.
Strategy
: Sell Put Option
Current Nifty index
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4191.10
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Put Option
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Strike Price (Rs.)
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4100
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Mr. XYZ receives
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Premium (Rs.)
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170.5
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Break Even Point (Rs.)
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3929.5
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(Strike Price - Premium)*
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* Breakeven Point is from the point of Put Option Buyer.
ANALYSIS: Selling Puts can lead to regular income in a rising or range bound
markets. But it should be done carefully since the
potential losses can be significant in case the price of the stock / index
falls. This strategy can be considered as an income generating strategy.
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The payoff schedule
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The payoff chart (Short Put)
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Net Payoff
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On expiry Nifty
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from the Put
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Closes at
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Option (Rs.)
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3400.00
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-529.50
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3500.00
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-429.50
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3700.00
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-229.50
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3900.00
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-29.50
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3929.50
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0
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4100.00
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170.50
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4300.00
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170.50
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4500.00
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170.50
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