Skip to content

Covered Put Trading Strategy-Bearish Strategy

Short-Call-Option-trading-strategy

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.

    Open FREE Acccount with us

     

    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

    No comment yet, add your voice below!


    Add a Comment

    Your email address will not be published. Required fields are marked *

    F & O

      20

      Per order + Get Instant Pledge Benefits* + Zero delivery Brokerage

      10

      Per order only (No hidden charges)

      Open FREE Demat Account in less than 10 minutes (Commodity & Currency)

      20

      Per order + Get Instant Pledge Benefits* + Zero delivery Brokerage

      10

      Per order only (No hidden charges)

      Open FREE Demat Account in less than 10 minutes

      20

      Per order + Get Instant Pledge Benefits* + Zero delivery Brokerage

      10

      Per order only (No hidden charges)

      Related Posts

      How to Use Open Interest for Intraday Trading or Trading?
      Open Interest (OI) is one of the very useful indicators in future and options (F&O)...
      Nifty breaches 23,000-mark for first time, Sensex hits new all-time high
      Just like Nifty Future, you can also find the Bank Nifty Future to trade in...
      What is Nifty Future: Lot Size & How to Trade in Nifty Futures?
      Nifty 50 is the main index of the NSE stock exchange and represents the market...