Short Put – An Options Trading Strategy for Bullish Market

Short Put is an advanced options trading strategy used by traders only. This strategy is used in bullish market conditions.

Know everything about this option trading strategy.


About Short Put

In simple words, a Short Put is an act of selling the puts when you have a bullish outlook for an underlying security.

In the case of a Short Put, the trader who sells put options is liable to buy that underlying security at a fixed price in the future.

Well, in terms of complexity, the Short Put is also a simple strategy involving the use of only one transaction. But this strategy is not meant for beginners due to the high risk involved.

If the price of the underlying security goes up in price, you earn profits, but if it falls, you will have to buy that underlying security.

Writing a Short Put requires a lot of trading experience, but it can be a useful strategy if the price of the underlying security goes up by a little margin.


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    When to use a Short Put Options Trading Strategy?

    As mentioned above, Short Put can be your go-to strategy if you expect the price of an underlying security to go up by a slight margin over a short period. This is because if you write a put and the premium for that put falls, you tend to earn profits.

    In case of a short price rise, the premium for the put you sold will fall because of time decay and the increase in the price of the underlying security.

    In simple words, you should opt for a Short Put if your outlook for the underlying security is bullish but not extremely bullish.

    This simply means that you expect the price to rise only by a short margin. The put you sold can give you profits even when the market is extremely bullish, but, in that case, a long call would be a better strategy.

    This is because Short Put gives you a limited amount of profits, but in the case of a long call, the profits can be unlimited, only if the outlook is extremely bullish.

    You can also earn profits if the price of underlying security does not change at all because the premium for the put will tend to fall because of time decay.

    The only case in which you can incur losses will be if the price of the underlying security falls.


    How a Short Put Options Strategy works?

    Since Short Put involves just one transaction i.e., selling/writing puts, people generally tend to think of it as an easy strategy, but that is not the case.

    The execution part of writing puts is undoubtedly very easy, but it is not advisable for beginners due to the high risk involved.

    In terms of execution, the fundamental of writing put suggests to write the put for a particular security and buy them when the price of the underlying security rises.

    Since you are selling the puts earlier and buying them when premium falls, the difference in premium is your profit.

    In the case of a Short Put, the buyer must keep in mind two major factors that are strike price and expiry date.

    The strike price is the target price at which you feel the security will rise, and the date of expiry is the date at which the option contract will expire.

    The puts for the strike price above the current market price would charge a higher premium, while those with a lower strike price will charge lower premiums.

    If you feel that the price of the underlying security will rise by a small margin, you should write ITM/ATMputs with a strike price closer to that of the market price or at the market price.

    Let’s take a few examples for a better understanding of the strategy:

    Short Put Strategy – Example 1

    Xyz Stock: 8000

    Short/SellATM put of strike price 8000 for a premium of 60

    Lot size of Xyz: 75

    (Xyz stock rises to 8150)

    In this case, the stock was at 8100 points, and you sell a put with a strike price of 8000 for which the premium paid was 60 per lot.

    Since the lot is 75 quantity, the total amount invested is 75*60= 4500 rupees. If the trade turns favorable and stock reaches a level of 8150, the put becomes OTM by the time of expiry, and its value is worthless

    Therefore, the total amount invested becomes your profit

    Net gain= 4500

    Short Put Strategy – Example 2

    Xyz Stock: 8100

    Short/Sell ATM put of strike price 8100 for a premium of 60

    Lot size of nifty: 75

    (Xyz stock stays at 8100)

    In this case, the stock was at 8100 points, and you sell a put with a strike price of 8000 for which the premium paid was 60 per lot. Since the lot is 75 quantity, the total amount invested is 75*60= 4500 rupees.

    If there is no change in the stock and it stays at 8100 only, the premium of the put will still fall because of time decay. So, if Xyz stock is at the 8100 mark, the put becomes ATM, and the value is worthless

    Therefore, the total amount invested becomes your profit

    Net gain= 4500

    Short Put Strategy – Example 3

    Xyz Stock: 8100

    Short/Sell ITM put of strike price 8000 for a premium of 60

    Lot size of nifty: 75

    (Xyz Stock falls to 8000)

    In this case, the stock was at 8100 points, and you sell a put with a strike price of 8000 for which the premium paid was 60 per lot.

    Since the lot is 75 quantity, the total amount invested is 75*60= 4500 rupees. If the Xyz stock falls to 8000, the value of your put rises, but since you have written the puts earlier, you will incur losses.


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    The risk involved and How to minimize risk while using a Short Put strategy?

    As discussed earlier, in terms of complexity, a Short Put is relatively easier than other strategies that involve multiple transactions.

    But there is a high risk involved as the trader does not have any other transactions to hedge this risk, and the trader is obliged to buy the underlying security at a fixed price in the future.

    Due to the high risk involved, beginners who are new to trading should not try this strategy. One of the easiest ways to minimize the risk involved in Short Put is to buy Out of the money puts, which are cheaper.

    Since the premium for put is less, a slight rise in the price of the security can also give you profits. Although these profits would be less, so is the risk involved in this case.

    Advantages of the strategy:

    • The execution of this strategy is simple and requires only one transaction.
    • You might earn profits even if the price of security remains the same
    • Since there is only one transaction involved, the commission charged is negligible

    Disadvantages of the strategy:

    • The margin requirement for writing puts is very high.
    • The amount of risk involved is very high because of which beginners should not try it.

    Conclusion: Short Put

    In simple words, the act of selling puts is known as a Short Put. It is a go-to strategy if you are an expert who feels that the price of the underlying security will go up by a slight margin.

    Short Put can give you limited profits even if the price of underlying security does not change.

    But the strategy requires rigorous analysis, and beginners must stay away from this due to the high risk involved.


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