A short put is an options strategy in the Indian stock market where an investor sells a put option, thereby taking on the obligation to purchase the underlying stock at a predetermined strike price if the buyer of the option decides to exercise it. In exchange for assuming this obligation, the seller receives a premium upfront, which represents the maximum profit they can earn from the trade. This strategy is most suitable in bullish or neutral markets, as it is profitable when the stock price stays above the strike price or experiences minimal decline, allowing the option to expire worthless. If this happens, the seller keeps the premium as income without having to buy the stock. Both NSE and BSE provide platforms for trading put options on various stocks and indices, making the short put strategy an accessible way to earn income from options premiums.
However, the short put strategy exposes the seller to potentially significant losses if the stock price falls well below the strike price, as they are obligated to buy the stock at the higher strike price regardless of how much it has declined. This risk profile requires careful market analysis and timing, as the potential for loss increases with steeper declines. Many investors use the short put in relatively stable or moderately bullish markets where they expect the stock to remain above the strike price, minimizing the likelihood of assignment. The NSE and BSE provide real-time data and options analytics to help investors evaluate put pricing, volatility, and underlying stock performance, all essential for managing risk in a short put strategy. While this approach allows for income generation, it requires a clear understanding of market conditions and an appetite for potential downside exposure in exchange for the limited premium received.
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Risk Disclosure on Derivatives
Source: SEBI Study
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