In this article, we will discuss
- What are Strategy Legs In A Short Put Strategy?
- What Will Be The Payoff Of The Strategy?
- Who can Deploy This Strategy?
- When Should This Strategy Be Deployed?
- Understanding Strategy Greeks
- Things to Keep In Mind
- Gain Profit From A Bullish View Using Short Put Strategy With Options BRO
Are you looking for a way to profit from a bullish view on a stock without buying it outright? Do you want to earn some income by selling options and taking advantage of time decay? If yes, then you might want to consider the short put strategy.
What are Strategy Legs In A Short Put Strategy?
A short put strategy is a simple and straightforward option strategy that involves selling a put option on a stock that you are bullish on. A put option gives the buyer the right, but not the obligation, to sell the underlying stock at a specified price (called the strike price) on a certain date (called the expiration date). By selling a put option, you are essentially agreeing to buy the stock at the strike price if the option is exercised by the buyer.
The short put strategy has only one leg, which is the put option that you sell. You can choose the strike price and the expiration date of the option depending on your view and risk appetite. The put option can be in the money (ITM), at the money (ATM), or out of the money (OTM).
- An ITM put option has a strike price higher than the current market price of the stock. This option has a higher premium and a higher probability of being exercised, which means you have a higher chance of buying the stock at a higher price than the market price.
- An ATM put option has a strike price equal to the current market price of the stock. This option has a moderate premium and a moderate probability of being exercised, which means you have a fair chance of buying the stock at the market price.
- An OTM put option has a strike price lower than the current market price of the stock. This option has a lower premium and a lower probability of being exercised, which means you have a lower chance of buying the stock at a lower price than the market price.
What Will Be The Payoff Of The Strategy?
The payoff of the short put strategy depends on the price of the underlying stock at expiration. The maximum profit you can make is the premium you receive when you sell the put option. The maximum loss you can incur is unlimited, as the stock price can theoretically drop to zero. The breakeven point of the strategy is the strike price minus the premium received.
Who can Deploy This Strategy?
The short put strategy is a bullish strategy that requires a high level of confidence and conviction in your view. It is also a risky strategy that exposes you to unlimited downside risk. Therefore, this strategy is not suitable for beginners or conservative traders. This strategy can be deployed by veterans who have a strong understanding of the market dynamics and the option pricing factors. It also requires a high capital as you need to have enough margin to cover the potential losses.
When Should This Strategy Be Deployed?
The short put strategy can be deployed when you are not bearish on the underlying stock below a certain support level. You can select the strike price around the identified level and sell a put option. This way, you can benefit from the premium income and the time decay of the option. You can also profit from a rise in the stock price above the breakeven point. However, you should be prepared to buy the stock at the strike price if the option is exercised by the buyer.
The short put strategy can also be used to enter a long position in a stock at a lower price than the current market price. By selling a put option, you are essentially creating a synthetic limit order to buy the stock at the strike price. This can be useful if you are bullish on the stock in the long term but want to buy it at a discount.
Understanding Strategy Greeks
Gamma measures the change in the delta for a unit change in the stock price. A short Gamma position is characterised by having negative gamma exposure, meaning that the delta decreases when the stock price rises and increases when the stock price falls. This is typically seen in Short Call and Short Put positions. This is unfavourable for the short put strategy as you want the delta to be close to zero and the option price to be less sensitive to the stock price. The gamma of a short put option is highest when the option is ATM and decreases as the option moves away from the ATM.
Theta measures the change in the option price for a unit change in time. For a short put option, theta is positive, which means the option price decreases as time passes, holding everything else constant. This is favourable for the short put strategy as you want the option price to decay and expire worthless. The theta of a short put option is highest when the option is ATM and decreases as the option moves away from the ATM.
Vega measures the change in the option price for a unit change in volatility. For a short put option, vega is negative, which means the option price decreases as volatility increases, and vice versa. This is unfavourable for the short put strategy as you want the option price to be low and stable. The vega of a short put option is highest when the option is ATM and decreases as the option moves away from the ATM.
Things to Keep In Mind
The short put strategy is a high-risk, high-reward strategy that can generate consistent income and profits in a bullish market. However, it also exposes you to unlimited losses in a bearish market. Therefore, you should be careful and cautious when deploying this strategy. Here are some things to keep in mind:
- Since this strategy involves the risk of unlimited losses, you should be ready with your exit strategy even before you enter into this trade. If the trade goes against your view, either you can maintain strict stop losses and cut the position or buy a further OTM put option to hedge yourself from the unlimited loss potential of this strategy.
- This strategy can reward you better in a higher implied volatility (IV) environment. When the IV is high, the option premiums are high, which means you can collect more income by selling the put option. However, you should also be aware of the volatility risk, as the option price can fluctuate significantly due to changes in volatility.
- The probability of profit can be very high in this strategy but if the stock price starts to move downwards sharply, the amount of losses can be very high. In other words, your strike rate (number of profitable trades out of total trades) will be high but your average loss (your average loss in the loss making trades) will also be very high. Therefore, you should not overtrade or allocate too much capital to this strategy.
Gain Profit From A Bullish View Using Short Put Strategy With Options B.R.O.
Options B.R.O. a proprietary options strategy builder within the Samco trading app, assists traders in identifying optimal options strategies tailored to their market outlook, risk tolerance, and return objectives. By conducting sophisticated mathematical analyses and evaluating numerous options contracts, including the short put strategy, Options B.R.O. generates recommendations for the top three strategies aligned with the trader's requirements. Additionally, it leverages market insights and Options Greeks to assess and rank each strategy effectively.
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