Bullish Option Strategy – Short Put

This item was filled under [ Option Strategies ]

This is another simple bullish strategy.
Note – I will not suggest it to use it until you understand the risk involved with of Naked Short Options. For freshers, it is better to use simple Long Call strategy.

Strategy = Short PUT
Construction = Sell one PUT option
Suitable Market Condition = Bullish trend (medium strong to mild bullish). Better to avoid this strategy in strong bullish conditions due to its limited profit profile. It is better to use Long Call strategy where profit potential is higher.
Suitable Volatility at entry = High volatility as collected option premium will be high. As volatility decreases in future, we will get extra profit due to drop in volatility premium.
Max Risk = Unlimited (theoretically) This will be hit when price at expiry remains below the strike price of PUT option.
Max Profit = Limited to the extent of difference between Premium recieved and Brokerage paid..
Breakeven Point = Strike price – Premium recieved. As long as market remains above breakeven point, the position will result in a profitable trade. But as market drops below the breakeven level, the losses will accumulate.
Historically, market drops are steeper then market rises, hence losses may accumulate very fast with Short PUT position.

Limitation - It is costlier due to higher margin requirement. .

Example

Market condition – NIFTY is finding support at 4000 level. Other moving average lines are also providing support near this zone. So we are bullish on the direction of market. Our analysis says that market might be heading towards 4300. So we decide to sell 4000 PUT.
Position construction = Sell 1, NIFTY 4000 PUT (@120 Rs.)
Breakeven point = 4000 – 120 = 3880
Max reward = 120 – brokerage.
Max risk = Unlimited (very high)

We can always cut our risk and don’t have to wait for accepting maximum risk. Read more about Managing loss on an options trade here.

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