Contents

Short PUT (or) Naked PUT

Short PUT or Naked PUT is a Bullish to Neutral Option Strategy. You use this strategy when you expect the stock price to rise or stay where it is. This means, you do not expect a fall anytime soon. You ideally want the PUT that you sold to expire worthless.

Trade Set-Up

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Short PUT (or) Naked PUT

Sell a Put Option

short put-Finvezto

Illustration Using Nifty Options

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Short 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
  • Bullish to Neutral Outlook
  • Do not enter when market is trending downwards
  • Price should be going up after bouncing from a true support zone
  • Volatility
  • Implied Volatility or India VIX should be high and falling when you sell the PUT Option
  • Open Interest
  • Heavy PUT Buildup around support zone
  • PUTs sold should be equal to or more than the CALLs sold
  • Strike Price
  • Sell Out-of-the-money (OTM) PUT options of the current month or current week
  • Choose shorter timeframes as time decay will be in favour of sellers
  • Positional or Intraday?
  • Sell current month options if you are planning to hold overnight
  • Sell OTM PUT options intraday depending on the OI build up for the day
  • Risk Profile

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    Risk [Loss]
  • Maximum Risk is unlimited. Hence, position needs to be managed with stop loss
  • Reward [Profit]
  • Maximum profit is limited to the premium received.
  • If you sell an OTM PUT option with delta less than -0.2, then the probability of success is more than 80%
  • You will receive the reward more often than not, although it is limited
  • Break Even Point
  • Strike Price minus the Premium Received
  • 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 helpful for this position
  • Volatility impact [Vega]
  • If volatility reduces after you sell the PUTs, then you will benefit
  • If volatility increases as price falls, you will incur huge losses
  • Price Impact [Delta]
  • As long as delta is between 0 to -0.5, you can hold on to the position.
  • If delta goes into the zone of -0.5 to -1, you will incur significant losses.
  • You should not hold the PUT option, when it becomes At-the-Money.
  • Trade Management & Exit

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    Stop Loss
  • Set a Stop Loss when you enter the position
  • Stop Loss should be set in such a way that Risk is limited to 1-2% of your entire capital
  • Exit when your stop loss is hit
  • Exit Conditions
  • Exit when price of the PUT option hits the Stop Loss
  • Exit when the delta of the PUT option reaches -0.5
  • Exit when price breaks below the support zone
  • A Word of Caution

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    Alert:

    • You need to be good at spotting true support zones to sell PUTs effectively. Learn how to spot them.
    • If you are a beginner, start by selling deep Out-of-the-money (OTM) PUT options far away from the support zone identified, even though the profit is limited. Get closer to the support zone, once you gain expertise.
    • Sell PUT options only on INDICES like Nifty & BankNifty. Indices are less volatile. Selling Naked PUTs on individual stocks is riskier as they are more volatile than indices.