Explanation
The covered put strategy is a bearish options strategy. The strategy involves shorting underlying stock in the expectation that the price of the security to fall and simultaneously selling a put option for some short-term profits. This strategy is exactly the opposite and works the same way as the Covered Call strategy, except that trader writes an option against a short position. The strategy typically makes sense when you have a neutral to slightly bearish sentiment and wants to take advantage of the price fall in the near future.
Risk
The risk is limitless in implementing this strategy.
Reward
The maximum reward in this strategy is limited to the premium received.
Construction
Sell 1 lot of Bank Nifty
Sell 1 NIFTY OTM Put Option
Payoff Chart
| Option Type | Expiry Date | Strike Price | LTP | Action | No. Of Lots |
| FUTURES | 27/04/2023 | -NA- | 39938.1 | Sell | 1 |
| PUT | 27/04/2023 | 37500.0 | 178.65 | Sell | 1 |
| Market Expiry | Payoff 1 | Payoff 2 | Net Premium | Option Payoff At Expiry |
| 38800.0 | 1138.1 | 0.0 | 178.65 | 1316.75 |
| 38900.0 | 1038.1 | 0.0 | 178.65 | 1216.75 |
| 39000.0 | 938.1 | 0.0 | 178.65 | 1116.75 |
| 39100.0 | 838.1 | 0.0 | 178.65 | 1016.75 |
| 39200.0 | 738.1 | 0.0 | 178.65 | 916.75 |
| 39300.0 | 638.1 | 0.0 | 178.65 | 816.75 |
| 39400.0 | 538.1 | 0.0 | 178.65 | 716.75 |
| 39500.0 | 438.1 | 0.0 | 178.65 | 616.75 |
| 39600.0 | 338.1 | 0.0 | 178.65 | 516.75 |
| 39700.0 | 238.1 | 0.0 | 178.65 | 416.75 |
| 39800.0 | 138.1 | 0.0 | 178.65 | 316.75 |
| 39900.0 | 38.1 | 0.0 | 178.65 | 216.75 |
| 40000.0 | -61.9 | 0.0 | 178.65 | 116.75 |
| 40100.0 | -161.9 | 0.0 | 178.65 | 16.75 |
| 40200.0 | -261.9 | 0.0 | 178.65 | -83.25 |
| 40300.0 | -361.9 | 0.0 | 178.65 | -183.25 |
| 40400.0 | -461.9 | 0.0 | 178.65 | -283.25 |
Option Trading Example
Suppose Bank Nifty is trading at 39600 levels, the trader is neutral or moderately bearish and expects the Bank Nifty to fall. He shorts 1 Bank Nifty Futures @ 40000 and simultaneously writes one 37500 out of the money (OTM) Put Option for a premium of Rs 180.
Scenario 1:
On expiry, if Bank Nifty closes at 39000 levels, then the trader will make a profit of
Profit = gain on short futures position + gain on premium received
Rs. 47120 = [(+40000 - 39000) + (178) *40]
Scenario 2:
On expiry, if Bank Nifty closes at 37300 levels, then the trader will make a loss of
Profit = Profit on futures position + Loss on premium received
Scenario 3:
On expiry, if Bank Nifty closes at 40500 levels, then the trader will make a loss of
Loss = loss on short futures + gain of premium received
12880 = ((-40500 + 40000) + (178)) *40
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