How We Buy Put? What is put? | Hedging Strategies By Vinay Bhandari
Buy Put
Buy Put (29 Hedging Strategies By Vinay Bhandari)
• How we buy put, Buying or “Going Long” on a Put is a strategy that must be devised when the investor is bearish on the market direction going down in the short-term.
• A Put Option gives the buyer of the Put a right to sell the stock (to the Put Seller) at a pre-specified price and thereby limit his risk. “Being Long” on a Put Option means the investor will benefit if the underlying Stock/Index falls. However, the risk is limited on the upside if the underlying Stock/Index rallies.
• Investor View: Bearish on the Stock / Index.
• Risk: Limited to the premium paid.
• Reward: Unlimited.
• Breakeven: Strike Price – premium paid.
• Illustration
• E.g. Nifty is currently trading @ 15500. The investor is expecting the markets to fall from these levels. So buying a Put Option of Nifty Strike 15500 @ premium 50, the investor can gain if Nifty falls below 15450.
|
Strategy |
Stock /Index |
Type |
Strike |
Premium |
|
Buy Put |
NIFTY (Lot size 75) |
Buy Put |
15500 |
50 |
• The Payoff Schedule for the above is below.
Payoff Schedule
|
Nifty @ Expiry |
Payoff |
|
15100 |
26250 |
|
15200 |
18750 |
|
15300 |
11250 |
|
15400 |
3750 |
|
15450 |
0 |
|
15500 |
-3750 |
|
15600 |
-3750 |
|
15700 |
-3750 |
|
15800 |
-3750 |
Payoff chart
• In the above chart, the breakeven happens the moment Nifty crosses 15450, and risk is limited to a maximum of
• 3750 (calculated as Lot size * Premium Paid)