Short or selling a Put is the opposite of buying a Put. An investor buys a Put when they are bearish on a stock. An investor sells a Put when they are bullish about the stock and expects the stock price to rise or stay sideways at the minimum.
When you sell a Put, you earn a premium (from the buyer of the Put). You have sold someone the right to sell you the stock at the strike price. If the stock price increases beyond the strike price, the short put position will make a profit for the seller by the amount of the premium, since the buyer will not exercise the Put option and the Put seller can retain the premium (which is their maximum profit). However, if the stock price decreases below the strike price, by more than the amount of the premium, the Put seller will lose money. The potential loss is unlimited (until the stock price falls to zero).
When to Use: The investor is very bullish on the stock/index. The main idea is to make short-term income.
Risk: Put strike price – Put premium.
Reward: Limited to the amount of premium received.
Breakeven: Put strike price - Premium
Example:
Mr. XYZ is bullish on Nifty when it is at ₹4191.10. He sells a Put option with a strike price of ₹4100 at a premium of ₹170.50 expiring on 31st July. If the Nifty index stays above ₹4100, he will gain the amount of premium as the Put buyer won’t exercise his option. In case the Nifty falls below ₹4100, the Put buyer will exercise the option, and Mr. XYZ will start losing money. If the Nifty falls below ₹3929.50, which is the breakeven point, Mr. XYZ will lose the premium and more depending on the extent of the fall in Nifty.
Analysis: Selling Puts can lead to regular income in a rising or range-bound market. But it should be done carefully since potential losses can be significant if the price of the stock/index falls. This strategy can be considered an income-generating strategy.