Thursday, 11 April 2013

Long Put - Bearish Strategy


Long Put: Going Long in a Put is a strategy that is opted when the option trader is Bearish on the market direction going down in the short-term. If we think Index or Stock will fall buying put is advisable

Put options have a limited lifespan. If the underlying stock price does not move below the strike price before the option expiration date, the put option will expire worthless.

When you buy a put option you want the stock price to fall. Even if it falls to zero, your put option gives you the right to sell it at the specified price

In Indian Terminology we would say a put is purchased when a trader feels market will be in Mandi

Nifty Options Buy Put
Buy 1 ATM Index Call

Investor View: Bearish on Index or Stock

Risk: Limited to premium paid + Brokerage + Commissions Paid

Reward: Unlimited

Illustration:

Index
Nifty
Nifty Lot Size
50
Underlying Strike Price
5500
Put Premium
35.80 (Premium Paid)
Breakeven Point
5464.20 (Strike Price – premium paid)


Log Put



<!--[endif]-->
<!--[if !supportLists]-->·        <!--[endif]-->Maximum Profit: Unlimited
<!--[if !supportLists]-->·        <!--[endif]-->Profit Achieved when Nifty Settlement Value < Nifty Strike Price + Premium Paid
<!--[if !supportLists]-->·        <!--[endif]-->Profit : Nifty Strike Price – (Nifty Put Strike Price + Premium Paid)

Breakeven Point: Formula for Breakeven point
<!--[if !supportLists]-->·        <!--[endif]-->Breakeven point : Nifty Put Option Strike Price + Premium Paid
                



Nifty Closing Price @
Profit/Loss
5200
+13210 (Profit)
5300
+8210  (Profit)
5400
 +3210 (Profit)
5500
-1790  (Loss)
5600
-1790  (Loss)
5700
-1790  (Loss)
5800
-1790  (Loss)

Example:

Let us assume Nifty will decline in the near future, an options trader purchases a 25th April put with a strike price of 5500 for a quoted premium of ` 35.80/- per contract. With a contract multiplier of 50, the cost of the Nifty index Put option comes to ` 1790/-

Suppose Nifty went to 5400 in April and the option trader Nifty April 5500 Strike Price Put option expires in the money. At Settlement value of 5400, Nifty 5500 call option will possess an intrinsic value of ` 64.2/- and exercising this option will give the trader a settlement amount of ` 5000/- (i.e 100 X 50 lot size). Taking in consideration the cost of option itself, which is ` 1790 (35.80 X 50 Lot Size)/-, traders net profit comes to ` 3210/- (64.2 X 50 Lot Size)

Suppose Nifty Settled down to 5600 in April and the options trader’s Nifty April 5500 Index Put expires out of the money, at the expiry date settlement value of Nifty @ 5600 , call option expires worthless with zero Intrinsic value resulting in net loss of premium paid 

For More Information about other strategies kindly click on below links
Guide To Options Basics
Long Call
Short Call 
Short Put
Long Straddle
Short Straddle
Synthetic Long Call