LONG PUT
Long Put Option Trading Strategy is a very simple and very basic Strategy. Mostly we use this strategy whenever Nifty or Bank Nifty is bearish in the market or any stock is bearish, then we can go for a big profit with small risk in the put option buying of that index or stock, just buy the put option. The position created in this way is called long put.
For example, if the Nifty index is going down, then Nifty can be bought in “at the money” put option and the put option can be sold after getting good profits.
Some important points before trading.
1. Whichever index or stock is going to be down, use that put option only. Buy-side position should be created.
2. Both call option and put option are traded according to expiry, where we have to take trade keeping in mind the expiry time also.
3. Long Put Option Strategy, a trade is good for small risks and big profits, but the full premium we have paid to create the position. That is our total risk, where if we do not set a stop loss, we can suffer a huge loss. Therefore, we should create long-put positions with as much capital as our risk appetite is.
4. Even, if the index does not decline after buying in the long-put option trading strategy, we will still suffer a loss. But if the index rises, I will lose even more. Therefore, long put option strategy should be used only, if 70 to 80% accuracy is correct.
5. Before the recession in the market, buy the index or stock put option either “in the money” option or “at the money” option. Avoid “out the money” Option, because you dont get much profit and if there is not much momentum then only loss occurs.
Let us easily understand with the help of the option chain and also see the situation, and what kind of profit we can get.
As shown in the option chain above, Nifty is trading at 20906, “at the money” Option, the price of the Nifty 20906 put option is ₹95, today's date is 12th Dec and the expiry of Nifty index is the date is December 14th, so this option has 2 days to expire. Here we have plenty of time as well as the option price of ₹95.
NIFTY LOT SIZE 50 & PRICE 20900 PUT ₹95
TOTAL PREMIUM PAID (BUY POSITION) = 95× 50= ₹4750
Maximum loss =₹4750 if stop loss is not applied
Maximum Profit = Countless profits can be earned, if the market continues to be bearish, or even if the target we have set before is achieved, we can earn profit.
LONG PUT IMAGE
Situation-1 If there is a recession in the market and the market goes below the level of 20906 then we will see profit in the put option. If the market goes below 20700, we will see a profit of up to 150 points in the put option. But if the market goes down on the same day, our profit will be in even more points.
For example, if the market closes at the level of 20700 at expiry, then it will be 20900-20700=200 points, where the price of our put option is ₹95, then we will also get its price minus will give profit from the put option of 200-95=105 points profits.
Situation-2 If there is an uptrend in the market and the market goes above 20900, then we will start making losses in the put option. If we do not set a stop loss and the market continues to go up, we may incur a huge loss on the position, we have purchased.
For example, if the market expiry closes above 20900, then a trade of ₹4750 has been taken in the 20900 put option, then that trade will be a complete loss, and the price of the option at expiry will become zero. If we have not set any stop loss, we should use as much capital as we can risk to create a long call position.
Situation-3 If the market neither sees a bullish nor a bearish, as we had thought based on the analysis, then we may suffer a loss. So as our loss is already estimated that is, the money we have invested in purchasing, will be a loss. Therefore, only 10 to 15% of our total capital should be used in this strategy.
For example, if the market expiry is around 20900, then the price of the put option will time decay due to theta, its price will gradually reduce till expiry and maybe its price will come down to ₹10-12.
(To understand this more easily, please read Option Greeks, which I have explained very well.)
What should be the stop loss and target in the long put position? How much more money will be required?
You can’t immediately decide on setting stop loss and target in the option price as it depends on the market movements. If there is not much down in the market then there is time decay in options due to theta, and its Option premium value will reduce. So, this price is not fixed at all, still to have a common stop loss and target, whatever price we will buy in the option, around 20-30% of that price should be the target and 15-20% should be its stop-loss.