How We Sell Put ? | What is Sell Put ? | What is Short Put ?
Sell Put
Sell Put (29 Hedging Strategies By Vinay Bhandari)
• Selling or “Going Short” on a Put is a strategy that must be devised when the investor is bullish on the market direction and expects the stock price to rise or stay sideways at the minimum
• When an investor sells a put, he/she earns a Premium (from the buyer of the Put). If the underlying price increases beyond the strike price, the short put position will make a profit for the seller by the amount of the premium. But, if the price decreases below the strike price, by more than the amount of the premium, the Put seller will lose money.
• Investor View: Very Bullish on the Stock / Index.
• Risk: Unlimited.
• Reward: Limited to the premium received.
• Breakeven: Strike Price – premium received.
• Illustration
• Eg.
Nifty is currently trading @ 15500. The investor is Bullish on the market. So by going selling a Put Option of Nifty having Strike 15500 @ premium 50, the investor can gain if Nifty goes above 15450.
|
Strategy |
Sock / Index |
Type |
Strike |
Premium |
|
Sell Put |
Nifty ( Lot 75 ) |
Sell Put |
15500 |
50 |
• The Payoff Schedule for the above is below.
• Payoff Schedule
|
Nifty @ Expiry |
Net Payoff |
|
15100 |
-26250 |
|
15200 |
-18750 |
|
15300 |
-11250 |
|
15400 |
-3750 |
|
15450 |
0 |
|
15500 |
3750 |
|
15600 |
3750 |
|
15700 |
3750 |
|
15800 |
3750 |
|
15900 |
3750 |
Payoff chart
• In the above chart, the breakeven happens the moment Nifty crosses 15450 and risk is unlimited. It is important to note that irrespective of how much the market gains, the reward is limited to 3750 only.
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