MFM

GROUP 2

LONG PUT & SHORT PUT

 Team Members

› 714 – Maumita Bhaumik

› 731 – Shruti Kanchan
› 733 – Chirag Kateliya
› 734 - Prakash Khati
› 738 - Rohan Lakhani
› 739 - Shahina Lakhani
› 756 - Reshma Poojary
› 757 - Sushma Poojary
› 765 - Rabab Sabuwala
› 780 – Bhavika Sirsat
 Introduction
• Put options give holders of the option the right, but not the obligation, to sell a specified amount of an underlying security at
a specified price within a specified time frame.
• Put options are available on a wide range of assets, including stocks, indexes, commodities, and currencies.
• Put options increase in value as the underlying asset falls in price, as volatility of the underlying asset price increases, and as
interest rates decline.
• Put options lose value as the underlying asset increases in price, as volatility of the underlying asset price decreases, as interest
rates rise, and as the time to expiration nears.

Long Put Short Put

› A long put has a strike price, which is the › A short put is also known as an uncovered put. If
price at which the put buyer has the right an investor writes a put option, that investor is
to sell the underlying asset. obligated to purchase shares of the underlying
stock if the put option buyer exercises the option.
› Requiring
. less capital than shorting the
stock outright. › The short put holder could also face a substantial
loss prior to the buyer exercising, or the option
expiring, if the price of the underlying falls below
the strike price of the short put option.
 Strategy

Long Put Short Put

A Long Put strategy is a basic strategy with the Bearish

› A short put is another Bullish trading strategy wherein
market view. Long Put is the opposite of Long Call. Here you
your view is that the price of an underlying will not
are trying to take a position to benefit from the fall in the
move below a certain level. The strategy involves
price of the underlying asset. The risk is limited to premium
entering into a single position of selling a Put Option. It
while rewards are unlimited.
has low profit potential and is exposed to unlimited risk.
Long put strategy is similar to short selling a stock. This
A short put strategy involves selling a Put Option only.
strategy has many advantages over short selling. This
For example if you see that the shares of a Company A
includes the maximum risk is the premium paid and lower
will not move below Rs 1000 then you sell the Put
investment. The challenge with this strategy is that options
Option of that stock at Rs 1000 and receive the premium
have an expiry, unlike stocks which you can hold as long as
amount. The premium received will be the maximum
you want.
profit you can earn from this trade. However, if the price
Let's assume you are bearish on NIFTY and expects its price
. of the underlying moves below 1000 then you will incur
to fall. You can deploy a Long Put strategy by buying an ATM
unlimited losses.
PUT Option of NIFTY. If the price of NIFTY shares falls, the put
option will now be in-the-money with an intrinsic value. This
could result in unlimited profits. However, if the price of NIFTY
rises, the put option will expire worthlessly and the maximum
loss incurred will be the premium paid.
 Market view and When to use?

Long put Short put

Market View Market View

Bearish Bullish

When you are expecting a drop in the price of the When you are expecting the price or volatility of the
underlying and rise in the volatility. underlying to increase marginally.

When to use? When to use?

A long put option strategy works well when you're Short Put works well when you're Bullish that the price of
expecting the underlying asset to sharply decline or be the underlying will not fall beyond a certain level.
volatile in near future.
 Examples of Long Put

Assume stock XYZ has a price per share of $100. An investor buys one call option for XYZ with a strike price of $95 expiring in one
month. He expects the stock price to fall below $95 in the next month.
As the holder of the option, he has the right to sell 100 shares of XYZ at a price of $95 until the expiration date. One option contract is
equal to 100 shares of the underlying stock.

Let’s assume the premium for the put option costs $3 per share. Therefore, the holder pays $300 for the put option to the option
writer. This amount is the maximum amount the holder can lose.

Assume the price of XYZ falls to $90 in that month. Now, the holder can exercise the put option and sell 100 shares of stock at $95,
rather than $90. The holder can buy the shares of stock at the market price of $90, then immediately sell the shares at $95. This
generates a profit of $5 per share for the holder.

However, if the share price never falls below the strike price of $95, then the put option expires, and the holder is at a loss of $300
because of the premium.
 Examples of Long Put

Let's assume you're Bearish on Nifty currently trading at 10,400. You expect it to fall to 10,000 level.

You buy a Put option with a strike price 10,000.

If the Nifty goes below 10,000, you will make a profit on exercising the option. In case the Nifty rises contrary to expectation, you will
incur a maximum loss of the premium.
 Example of Short Put

Assume stock XYZ has a price per share of $100. An investor sells one put option with a strike price of $98 that expires in a month.
The investor expects the price of XYZ to increase within the next month.

For writing the put option, the investor receives a premium of $3 per share, or a total of $300.
Assume that within the month, stock XYZ never closes below $98. The option expires as worthless. The option writer profits $300
because of the premium.

However, let’s assume the share price did fall to $95 within the month. In this case, the option would have been exercised and the
option writer would be obligated to buy the shares of stock at $98 rather than $95. That comes out to be a loss of $3 per share for
the option.
 Risk and Reward

Long put Short put

Risk Risk

The risk for this strategy is limited to the premium paid There is no limit to losses incurred in the trade. The risk is
for the Put Option. Maximum loss will happen when price when the price of the underlying falls, and the Put is
of underlying is greater than strike price of the Put exercised. You are then obliged to buy the underlying at
option. the strike price.

Reward Reward

This strategy has the potential to earn unlimited profit. The profit is limited to premium received in your account
The profit will depend on how low the price of the when you sell the Put Option.
underlying drops.
 Risk and Reward

Long put Short put

Maximum profit scenario Maximum profit scenario

Long put Underlying goes down and Option exercised Underlying doesn't go down and options remain
exercised.
• Maximum Profit = Unlimited
• Maximum Profit Achieved When Price of Underlying = 0 Maximum Loss Scenario
• Profit = Strike Price of Long Put - Premium Paid
Underlying goes down and options remain exercised
Maximum Loss Scenario

Underlying goes up and Option not exercised

• Max Loss = Premium Paid + Commissions Paid

• Max Loss Occurs When Price of Underlying >= Strike
Price of Long Put
 Profit and Loss Scenario of Long Put

Profit Scenario
Advantages Loss Scenario
Disdvantages

Underlying goes down and Option exercised Underlying goes up and Option not exercised
• Maximum Profit = Unlimited • Max Loss = Premium Paid + Commissions Paid
• Maximum Profit Achieved When Price of • Max Loss Occurs When Price of Underlying >=
Underlying = 0 Strike Price of Long Put
• Profit = Strike Price of Long Put -
Premium Paid

.
 Profit and Loss Scenario of Short Put

Profit Scenario
Advantages Loss Scenario
Disdvantages

Underlying doesn’t go down and option

Underlying does go down and option
remain excercised.
exercised

.
 Advantages and Disadvantages of Long Put

Advantages Disadvantages

› Unlimited profit potential with limited risk. › Time decay.

› Requiring less capital than shorting the › Expiration Risk
stock outright.
› Potentially 100% loss on amount invested if the
strike price, expiration dates or underlying stock
are badly chosen.

.
 Advantages and Disadvantages of Short Put

Advantages Disadvantages

› It allows you benefit from time decay. › It is a high risk startegy.

› Earn income in a rising or range bound › May cause huge losses if the price of the
market scenario. underlying falls steeply.

.
 CONCLUSION/SUMMARY: LONG PUT

› A long put refers to buying a put option, typically in anticipation of a decline in the underlying asset.
› The term "long" here has nothing to do with the length of time before expiration, but rather refers to the trader's
action of having bought the option with the hope of selling it at a higher price at a later point in time.
› A long put could also be used to hedge a long position in the underlying asset. If the underlying asset falls, the put
option increases in value helping to offset the loss in the underlying.

.
 CONCLUSION/SUMMARY: SHORT PUT

› A short put refers to when a trader opens an options trade by selling or writing a put option.
› The trader who buys the put option is long that option, and the trader who wrote that option is short.
› The writer (short) of the put option receives the premium (option cost), and the profit on the trade is limited to that
premium.

.
 KEY TAKEAWAYS

› Long Put-

› Investors go long put options if they think a security's price will fall.
› Investors may go long put options to speculate or hedge a portfolio.
› Downside risk is limited using a long put options strategy.

› Short Put-

› A short put is when a trader sells or writes a put option on a security.

.
› The idea behind the short put is to profit from an increase in the stock's price by collecting the premium associated
with a sale in a short put.
› Consequently, a decline in price will incur losses for the option writer.