Contents

Long PUT

Long Put is a Bearish Option Strategy. You buy PUTs when you expect the price to go down. Buying PUTS is another way of shorting a stock. If you short a stock, and if price moves upwards, your loss is unlimited. But, if you buy a put, and if price moves upwards, your loss is limited to the premium paid. PUTs can also be used to protect your stock portfolio.

Trade Set-Up

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Long Put

Buy a Put Option

Naked Put-Finvezto

Illustration Using Nifty Options

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Long Put-Finvezto
Snapshot from Upstox.com Strategy Builder

In the pay-off graph above, the price of the underlying asset (Nifty) is plotted in the X-Axis and the profit/loss is plotted in the Y-Axis.

The black line with dots indicates the profit or loss at different prices of the underlying asset.

The region shaded in green indicates profitable zone and the region shaded in grey indicates loss zone.

A positive number (75 = Buy 1 lot) in the Quantity column indicates a Buy position and a negative number (-75 = Sell 1 lot) indicates a Sell position.

Entry Checklist

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Market Outlook
  • Enter only when the price is Extremely Bearish
  • Do not enter even if your view is moderately bearish
  • Price should be falling from a resistance zone or it should have broken a support zone.
  • Volatility
  • Implied Volatility or India VIX should be low when you buy the PUT Option
  • Open Interest
  • Enter when long unwinding is happening or when there is Short Buildup
  • Long Unwinding + Short Buildup is ideal for entry
  • Strike Price
  • Buy PUT options that are In-the-Money. That is, Delta value between -0.8 to -1
  • In-the-money (ITM) options are more expensive than Out-of-the money (OTM) options. But, the premium increases on par with the underlying index or stock price
  • Exit the position, when the delta goes above -0.5
  • Positional or Intraday?
  • If you hold stocks in your portfolio, you can use PUT options to protect your stocks overnight
  • If you are just looking to speculate and trade just the PUT options, do not hold overnight as there is a risk of huge Theta decay
  • Trade only Intraday in weekly options
  • Hold overnight only when you buy Far Month options
  • Alert: Beginner level traders buy Out-of-the-money (OTM) PUT options at a cheap price and expect the value of the option to become 10 or 100 times in a short span. They do not understand that the probabilities are against them. You might not have the capital to sell PUT options, but, it doesn't mean you will buy PUT options and lose money. Please avoid buying PUT options if the above conditions are not met.

    Risk Profile

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    Risk [Loss]
  • Maximum Risk is limited to the premium paid
  • You cannot lose more than the premium
  • Reward [Profit]
  • Profit when the stock price falls significantly
  • Maximum profit when stock price falls to zero. It is unlikely though.
  • Break Even Point
  • Strike Price - Premium Paid
  • Options Greeks Impact

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    Time Decay Impact [Theta]
  • Time decay will erode premium and reduce the value of the PUT option
  • Time decay is harmful for the position
  • Volatility impact [Vega]
  • If volatility increases after you buy PUTs, then premium will go up
  • If price also goes down, then you are in for good profits
  • Price Impact [Delta]
  • As long as price is bearish and delta is between -0.8 to -1, you can hold the position
  • If delta value goes between -0.5 to 0, there will be quick erosion of premium
  • Trade Management & Exit

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    Stop Loss
  • Both Price and Time should be considered as Stop Loss
  • Suppose you bought a weekly PUT option for Rs 80
  • Exit when it becomes Rs 70 or exit after 10 mins, whichever comes first
  • Do not hold for more than 10 minutes if price is not moving in your direction
  • If price moves in your direction, trail your stop loss before exiting
  • Exit only through trailing Stop Loss. Otherwise, you will be limiting your profits
  • Exit
  • Exit when price of the PUT option falls by 10-15%
  • Exit when the delta value goes above -0.5 towards 0
  • Exit when price does not move in the desired direction for more than 10 mins.
  • Exit when price reaches a support zone
  • Exit through Stop Loss or Trailing Stop Loss
  • Alert: Do not over-Leverage. Do not buy huge quantities of OTM PUT options and expect price to move up significantly. You will lose significantly. The loss in the price of the PUT option should be limited to 10-15% and your position size should be such that the loss is less than 0.5% of your total capital. Remember, markets stay in ranges most of the time. They trend only one-third of the time or even lesser. So, buy PUTs only in bearish trending markets.