Friday, 12 April 2013

Sell Put - Bullish Strategy

Short Put: Selling a Put Option is a strategy that must be opted when the option trader is mildly bullish on the market. On selling a Put Option, the investor earns a Premium (from the buyer of the Put).

This strategy is a high risk venture with limited profit and a possibility of unlimited loss potential. 
Although easy to execute it is a risky strategy since the seller of the Put is exposed to unlimited risk.

In Indian markets this strategy is used when investor feel market may have a bull run


Nifty Options Sell Put
Sell 1 OTM Index Put

Investor View: Bullish on Index or Stock

Risk: Unlimited

Reward: Premium Received – (Brokerage + Statutory Charges)

Illustration:

Index
Nifty
Nifty Lot Size
50
Underlying Strike Price
5500
Put Premium
    53.35 (Put Premium Received)
Breakeven Point
` 5446.65 (Strike Price - Premium Received)



Short Put


Profit

·        Max Profit: Premium Received – (Brokerage + Statutory Charges)
·        Profit Achieved when Nifty Settlement Value >= Nifty Strike Price of Put Sold

Loss 

·        Max Loss = Unlimited
·        Loss Occurs When Price of Nifty  < Strike Price of Short Put - ( Premium Received + Brokerage + Statutory Charges)
·        Loss = Strike Price of Short Put - Price of Nifty Settlement Value - Premium Received + Brokerage Paid


Nifty Closing Price @
Profit/Loss
5300
7332.50 (Loss)
5400
2332.50 (Loss)
5500
2667.50 (Profit)
5600
2667.50 (Profit)
5700
2667.50 (Profit)




Let us assume Nifty is currently trading at 5600. An options trader decides to Sell(writes) Nifty Apr 5500 out-of-the-money naked Put for Rs 53.35. So trader receives premium of Rs 2667.50 (53.35 X 50 Lot Size) for Selling Put Option

On expiration date, the Nifty had rallied to Rs 5400. Since the Nifty strike price of 5500 for the Put option is lower than the current trading price, the put is assigned and his net loss is Rs 2332.50 ((Nifty Put Option Strike Price 5500 - Nifty Settlement Value i.e 5400)-Premium Paid i.e 53.35) X 50 = 2332.50

However, let’s take a look where nifty closes down at 5600

At Rs 5600, the Put expires worthless and the writer of the naked put keeps Rs 2667.50 (53.35 X 50 Lot Size) in premiums received as profit.

From the profit graph above, we can see that the breakeven is at Rs 5446.65 (Put Strike - Premium). So long as the stock price remains at Rs 5663.45 or above, the naked put writer will not suffer any loss.


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