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Put Options


Put Option


What is Put Option ?


Put Option is an option where buyer gets the right to sell the Underlying but not any obligation. Buyer of the Put option expects the price to go down. The Maximum loss to the buyer of the Option is limited up to premium paid. If prices falls than Put buyer earns unlimited profit. Let us look at one example to make it clear.


Pay off of Put Buyer


Mr. Y has purchased the Nifty 24 June2013, 5100 Put Option at Rs.100.
Here, Underlying is Nifty. || Strike Price is 5100. || Option is Put Option (Right to Sell). || Maturity (Expiry) is 24 June 2013. || Premium is Rs.100.


So when spot price falls below 5100, Mr. Y will exercise his right to sell Nifty at 5100. So he will get benefit when market falls below 5100. So if Market falls to 4900 he will get Rs.200 back but as he has paid Rs. 100 as premium so his net profit would be Rs.100.


Pay off for Put Buyer


Spot Price Payoff
4700 300
4800 200
4900 100
Spot Price Payoff
5000 -0
5100 -100
5200 -100
Spot Price Payoff
5300 -100
5400 -100
5500 -100


Break Even Point for Put Options


BEP is a point when Option seller and buyer arrive at no profit and no loss situation. It is the price where trader is neither earning nor losing any money. Here, both buyer and seller remain at cost to cost.
For Put option BEP = Strike price - premium.
In above both example, 5100 - 100 = 5000. (Strike - Premium)
That means, when spot reaches 5000, Mr. Y neither earns nor loses any money.


When to buy Put Options



How to Decide Strike in Long Put



Greek Behaviour for Long Put​



Pay off of Put Seller​


Now suppose Mr. Y has sold the above option. Now his maximum profit is up to premium he received and his loss is unlimited. Now when market moves the payoff of seller is as follows:


Pay off of Put Seller​


Spot Price Payoff
4700 -300
4800 -200
4900 -100
Spot Price Payoff
5000 0
5100 100
5200 100
Spot Price Payoff
5300 -100
5400 100
5500 100


When to Sell Put Options



Greek Behaviour for Short Put



Benefit of Put Option


As like Call Option, Put Option also provides us Right but not any Obligation. Here we get Right to Sell. People buy Put Option when they have bearish view of the Market. The main benefits of Put Option Trading are :


  • Put Buy carries limited loss Profile
  • Put Buy Provides Unlimited Profit Profile.
  • Put Buy requires investment of Premium only. So it is having low investment requirement.
  • Investors can earn Time Value by selling Put Option.
  • Put Spreads like Bull Put Spread and Bear Put Spreads can earn money if your view goes correct and simultaneously incurs small losses if your view goes wrong.
  • During high volatility, it becomes difficult to keep stop losses in Futures while Put Option give us the surety of Max loss figure without keeping any stop losses.





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