📑 Table of Contents
- What is a Short Put Option Strategy?
- ✅ Strategy Overview
- 🔍 When to Use the Short Put Strategy?
- 📊 Real-World Example 1: Bank Nifty
- 📊 Real-World Example 2: NIFTY Options
- 📌 Key Takeaways
- 👍 Pros & 👎 Cons
- 🔚 How to Exit?
- 📌 Final Thoughts
- ❓ Frequently Asked Questions (FAQs)
📉What is a Short Put Option Strategy?
A Short Put Option strategy is a bullish trading approach where the trader sells a Put Option, expecting the underlying asset not to fall below a specific price level. The profit is limited to the premium received, while the risk is theoretically unlimited.
✅ Strategy Overview
| Strategy Type | Bullish |
|---|---|
| Instruments Used | Put Options |
| Number of Positions | Single |
| Maximum Profit | Limited to Premium Received |
| Maximum Loss | Potentially Unlimited |
| Breakeven Point | Strike Price – Premium |
🔍 When to Use the Short Put Strategy?
You can apply a Short Put strategy when:
- You are bullish to neutral on the stock/index.
- You believe the underlying will stay above a certain price.
- You want to earn income through time decay (theta).
📊 Real-World Example 1: Bank Nifty
Bank Nifty Spot Price: ₹58,900
Strike Price Sold: ₹58,800
Premium Received: ₹400
Lot Size: 35
📌Break-Even Point: ₹58,800 - ₹400 = ₹58,400
🔽 Payoff Table
| Bank Nifty on Expiry | Premium Received | Loss/Gain on Option | Net Payoff |
|---|---|---|---|
| ₹58,000 | ₹14,000 | -₹28,000 | -₹14,000 |
| ₹58,200 | ₹14,000 | -₹21,000 | -₹7,000 |
| ₹58,400 | ₹14,000 | -₹14,000 | ₹0 |
| ₹58,600 | ₹14,000 | -₹7,000 | ₹7,000 |
| ₹58,800 | ₹14,000 | ₹0 | ₹14,000 |
| ₹59,000 | ₹14,000 | ₹0 | ₹14,000 |
📊 Real-World Example 2: NIFTY Options
NIFTY Spot Price: ₹25,500
Strike Price Sold: ₹25,400
Premium Received: ₹225
Lot Size: 75
Premium Total: ₹16,875
📌Break-Even Point: ₹25,400 – ₹225 = ₹25,175
| NIFTY on Expiry | Net Payoff (₹) |
|---|---|
| ₹24,700 | -₹35,625 |
| ₹24,900 | -₹20,625 |
| ₹25,100 | -₹5,625 |
| ₹25,175 | ₹0 |
| ₹25,400 | ₹16,875 |
| ₹25,600 | ₹16,875 |
| ₹25,800 | ₹16,875 |
Note: Maximum gain is capped at the premium received: ₹16,875
📌 Key Takeaways
🎯 Actions
- Sell a Put Option at a strike price below the current spot price.
- Collect the premium upfront, which becomes your max profit.
📈 Market View
- Use this when expecting the price to remain stable or rise slightly.
⚠️ Risk Profile
- Unlimited Loss Potential if the price falls sharply.
- You are obliged to buy the asset at the strike price, even if the market value is much lower.
💰 Reward Profile
- Limited to Premium Received
- Profitable if the option expires worthless (i.e., underlying stays above strike).
👍 Pros & 👎 Cons
👍Pros
- Generates income from time decay (theta).
- Simple execution, no spreads required.
- Effective in sideways/bullish markets.
👎Cons
- Unlimited loss if the price falls sharply.
- High margin requirement.
- Requires active monitoring.
🔚 How to Exit?
- Buy back the Put Option to book profit or cut loss.
- Or let it expire worthless if the price stays above the strike.
📌 Final Thoughts
The Short Put Option Strategy is ideal for earning steady premiums in stable or rising markets. However, due to unlimited risk, it's best suited for experienced traders with a solid risk management system.
❓ Frequently Asked Questions (FAQs)
Q1. What is a Short Put Option Strategy?
A strategy where you sell a Put Option to earn the premium when expecting the asset to stay above a certain level.
Q2. Is a Short Put strategy risky?
Yes, it involves unlimited risk if the asset price drops below the strike significantly.
Q3. When should I use a Short Put?
When you're confident the price will stay above a certain level, bullish or neutral market view.
Q4. What’s the maximum profit?
Limited to the premium you received when selling the option.
Q5. Can I exit early?
Yes, by buying back the Put Option before expiry.
