Put Options

Introduction

A put option lets you profit when a stock or index falls, without the unlimited risk of short selling. For swing traders, puts are the easiest way to trade sell setups and to protect existing holdings.

What is a Put Option?

A put option gives the buyer the right, but not the obligation, to sell the underlying at the strike price on or before expiry. You buy a put when you expect the price to go down.

How a Put Option Makes Money

When the underlying price falls, the put premium usually rises. You sell the put at the higher premium and keep the difference.

Example 1: Profitable Put Trade

HIJ Ltd trades at Rs 1,000 after a 4-day rally to resistance. A bearish engulfing candle forms. The 1,000 strike put costs Rs 22. Lot size 500.

• Cost: 22 x 500 = Rs 11,000.
• In 4 days, HIJ falls to Rs 960. The put premium rises to about Rs 48.
• Sell the put. Profit = (48 - 22) x 500 = Rs 13,000.

Example 2: Losing Put Trade

HIJ breaks out upward to Rs 1,030 instead. The put falls to Rs 7.

• Loss = (22 - 7) x 500 = Rs 7,500.
• Maximum possible loss = Rs 11,000, the full premium.

Compare this to short selling futures, where a rally to Rs 1,030 would mean a loss of Rs 15,000 and could keep growing.

Put vs Short Selling

Breakeven at Expiry

Breakeven = Strike - Premium. For the 1,000 put bought at Rs 22, the stock must be below Rs 978 on expiry to profit if held to the end.

Using Puts as Insurance (Protective Put)

Suppose you hold 500 shares of HIJ bought at Rs 900 and it is now Rs 1,000. You are worried about a short-term fall but do not want to sell. Buy one lot of the 980 put. If the stock crashes to Rs 900, the put gains value and offsets much of the loss on your shares. The premium is the cost of this insurance.

When to Buy Puts

• A confirmed sell setup at resistance.
• A breakdown below support with strong volume.
• The overall market is weak.

Choosing the Right Put

• ATM or slightly ITM strike.
• Expiry with enough time, at least 2 to 3 weeks away.
• Good liquidity and tight bid-ask spread.

On GoPocket

On the GoPocket app, open the F&O segment for the stock or index, select the expiry and ATM put, and place a Limit buy order for one lot. Decide your target and exit level on the chart first.

Frequently Asked Questions

Can a put option make money if the market rises?

No. A bought put gains only when the underlying falls enough and fast enough.

Is buying a put safer than short selling?

Yes, in terms of maximum loss, which is limited to the premium.

Key Takeaways

• Buy puts when you expect a fall.
• Puts limit risk compared to short selling.
• Puts can also protect your existing holdings.

Disclaimer: Premiums and lot sizes are hypothetical. Derivatives involve high risk.