Explanation
A long put option trading strategy is a single-leg option strategy used by a trader/dealer when he perceives market volatility with a bias towards the downside. To execute this strategy, the trader would purchase options by paying a premium, which gives him the right but not the obligation to sell the underlying asset at a strike price at any time until the expiry date.
Risk
The maximum loss that options buyers could face is the premium paid-for-buying option.
Reward
Maximum reward for option buyer if the worst-case scenario for the market comes true, the price of the underlying losses its value and closes at 0.
Construction
Buy 1 Put Option
Payoff Chart
| Option Type | Expiry Date | Strike Price | LTP | Action | No. Of Lots |
| PUT | 27/04/2023 | 39700.0 | 692.8 | Buy | 1 |
| Market Expiry | Payoff 1 | Net Premium | Option Payoff At Expiry |
| 38800.0 | 900.0 | -692.8 | 207.2 |
| 38900.0 | 800.0 | -692.8 | 107.2 |
| 39000.0 | 700.0 | -692.8 | 7.2 |
| 39100.0 | 600.0 | -692.8 | -92.8 |
| 39200.0 | 500.0 | -692.8 | -192.8 |
| 39300.0 | 400.0 | -692.8 | -292.8 |
| 39400.0 | 300.0 | -692.8 | -392.8 |
| 39500.0 | 200.0 | -692.8 | -492.8 |
| 39600.0 | 100.0 | -692.8 | -592.8 |
| 39700.0 | 0.0 | -692.8 | -692.8 |
| 39800.0 | 0.0 | -692.8 | -692.8 |
| 39900.0 | 0.0 | -692.8 | -692.8 |
| 40000.0 | 0.0 | -692.8 | -692.8 |
| 40100.0 | 0.0 | -692.8 | -692.8 |
| 40200.0 | 0.0 | -692.8 | -692.8 |
| 40300.0 | 0.0 | -692.8 | -692.8 |
| 40400.0 | 0.0 | -692.8 | -692.8 |
Option Trading Example
Trader holds a bearish view on the Bank Nifty and expects it to make a steep correction in the near future. Bank Nifty is currently trading around the 39800 level. Trader goes long on 1 lot of 39700 Bank Nifty Put Option for a premium of Rs. 700 with an initial investment will be Rs. 28000. (700*40).
Scenario 1: If at the time of expiry, Bank Nifty makes a move as per the expectation of the trader and dips down to Rs. 38000 level, then the net profit will be Rs. 44000. [(39800 – 38000 -700) *40]
Scenario 2: On the contrary, if the Bank Nifty doesn’t fall or starts to march upward in a direction opposite to the trader’s expectation, then the maximum loss will be the premium amount paid.
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