Selling a Put Option
Selling a Put Option​
Selling (or writing) a put option gives the seller the obligation to buy an asset at the predetermined strike price if the buyer exercises the option. In exchange, the seller receives a premium. This strategy is best used when the seller expects the underlying asset to remain flat or rise.
Example​
Imagine Bank Nifty is trading at 18,400, and you sell a put option with a strike price of 18,400 for a premium of ₹315. If Bank Nifty stays above 18,400, the seller keeps the premium. However, if Bank Nifty falls, the seller is obligated to buy the asset at the strike price, potentially incurring losses.
Here’s a breakdown of possible scenarios:
| Price Movement | Premium Received | Profit/Loss |
|---|---|---|
| ₹18,400 | ₹315 | Break-even |
| ₹18,085 | ₹315 | Zero profit/loss |
| Below ₹18,085 | ₹315 | Loss begins |
Risks and Rewards​
- Maximum Profit: The profit is limited to the premium received, regardless of how high the underlying asset rises.
- Unlimited Loss: If the asset’s price falls significantly below the strike price, the seller could face substantial losses, as they are obligated to buy the asset at the strike price, even if its value plummets.
Application for AlgoTest Users​
In the Strategy Builder, AlgoTest users can create short put option strategies and test them using the Simulator to evaluate risk exposure before live trading. For instance, if the trader is confident that a stock or index will not fall below a certain level, writing a put option can be a way to generate premium income.