The risks and rewards of selling Put Options

Option Buyers and sellers have opposite views on the market. If the Put option buyer is bearish about the market, then clearly the Put option seller must have a bullish view on the markets.

When you sell a Put option, you receive a premium and selling a Put option requires you to deposit margin, which is considerably high.

For example, Nifty 18,300PE for May 18th expiry requires around Rs98,000 for selling it. For a Put Option seller profit is limited and loss is unlimited.

When do you sell a Put option?

You sell a Put option when you are bullish on a stock or when you believe the stock price will no longer go down.

When you are bullish on the underlying you can either buy the Call option or sell a Put option. The decision depends on how attractive the premium is

Profit & Loss for a Put option seller

♦ The Put option seller experiences a loss only when the spot price goes below the strike price. Loss is theoretically unlimited and therefore the risk is high. For example, if markets open gap down on any day because of some news and obviously the view of a Put option seller was bullish then the loss would be too high for a Put option seller.

♦ The Put Option seller’s profit is limited only to the extent of premium received. He will be in profit if spot is above strike price.

♦ At the breakdown point the Put option seller neither makes money nor loses money. However, at this stage he gives up the entire premium he has received.

P&L = Premium received – Strike Price – Spot Price

Breakdown point = Strike Price – Premium received

Understanding Put option selling with an example. On May 11, Nifty closed at 18,304pts. Since the market closed at 18,304pts, all options strike prices below 18,300 would give profit to option sellers. Assuming I sold Nifty 18,200PE on Monday. It opened at Rs41. On Thursday my profit would be 41*50= 2,050. Profit is limited to the extent of premium received.

With this, we have covered Call and Put option buying and selling. To sum up briefly if our view is bullish, we buy a Call option or sell a Put option. If our view is bearish, we buy a Put option and sell a Call option.

(The author is a homemaker, who dabbles in stock market investments in free time)