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Long Put Option Trading Strategy-Bearish Strategy

Short-Call-Option-trading-strategy

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).

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    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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