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Sell Put (Short Put) - An Option Trading Strategy.

In today's article, we are going to see the short put or sell put option strategy. It is a very basic and beginner-level strategy. You can implement this option strategy even if you have just entered the options market. We shall discuss short put strategy in detail.


Market outlook for the short Put option strategy:

The short-put option strategy is best-suitable when the market is bullish. If you predict that the underlying asset's price will not fall below a certain level, you can implement this strategy. In this strategy, you sell a single put option contract. The reason to sell the option contract might be that it has low-profit potential or risk in the future, or it could be anything else.


When to use the short put option strategy?

This strategy is best when the market is bullish and you are sure that the underlying asset's price will not fall beyond a certain level.


How to enter the short-put strategy?

The short put strategy is a single-leg strategy and involves only one put option contract. A trader needs to sell one put option contract to enter into the short put strategy.

  • Sell Put option contract.


Highest profit on the short put strategy:

In the short put strategy, the profit is very limited. The amount of profit is capped to the premium received by selling the put option contract.


The benefit of using the short-put option strategy:

One of the significant benefits of implementing the short-put strategy is it positively utilizes the time decay factor. It helps gain profit from the rising price or the range-bound prices in the underlying asset's market.


How to exit from this option strategy?

There are two methods to exit from the strategy. They are as below:

  • Buy the put option contract and book your profit

  • Let the put option contract expire, and you will have the premium as the profit


Illustration

Eg. Nifty is currently trading @ 5500. Investor is Bullish on the market. So by going selling a Put Option of Nifty having Strike @ 5500 premium 50, the investor can gain if Nifty goes above 5550.

Strategy

Stock/Index

Type

Strike

Premium Inflow

Short Put

NIFTY (Lot size 50)

Sell Put

5500

50

The Payoff Schedule and Chart for the above is shown alongside.


Payoff Schedule

NIFTY @Expiry

Net Payoff (Rs.)

5100

-17500

5200

-12500

5300

-7500

5400

-2500

5450

0

5500

2500

5600

2500

5700

2500

5800

2500


Sell Put (Short Put) - An Option Trading Strategy

In the above chart, the breakeven happens the moment Nifty crosses 5450 and risk is unlimited. It is important to note that irrespective of how much the market gains, the reward is limited to 2500 only.




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