Short Put Option: What It Is and How to Trade It

A Short Put position is a bullish options strategy, built on the belief that the price of the underlying asset will rise or stay steady. When a trader sells or "writes" a Put option, they receive a premium upfront, which represents their maximum potential profit from the trade. 

The downside? If the underlying asset drops significantly, the trader could face substantial, potentially unlimited, losses, making it a high-risk, high-reward strategy. 

What is a Short Put? 

A Short Put involves selling a put option with the expectation that the underlying will either rise or remain above the strike price until expiry. It's similar in outlook to a Long Call, but the payoff dynamics differ. 

Here’s a breakdown of the concept: 

• The trader collects the premium when selling the Put, this is the maximum gain possible. 

• If the underlying falls, the Put option gets exercised, and the seller is obligated to buy the stock at the strike price, leading to losses. 

Example Payoff Breakdown 

Imagine selling a 17,300 strike Nifty Put option for ₹202 premium. 

• Total Premium Received: ₹202 x 50 = ₹10,100 

• Breakeven Point: 17300 – 202 = 17098 

• Maximum Profit: ₹10,100 (if Nifty stays above 17,300) 

• Potential Loss: Grows as Nifty drops below breakeven 

Short Put Basics 

A Short Put is the opposite of buying a put. Instead of paying for downside protection, you are offering that protection in return for the premium. 

Here's what happens when you short a Put: 

• You are selling someone the right to sell a stock to you at a specified price (strike) before expiry. 

• If the stock stays above the strike, the option expires worthless, and you keep the premium. 

• If the stock drops below the strike, you're obligated to buy it at the strike price. 

Practical Illustration 

Let’s say a stock is currently trading at ₹110, but an investor wishes to buy it at ₹100. Instead of waiting passively, they can sell a ₹100 Put: 

• If the stock stays above ₹100 → they earn the premium. 

• If the stock falls below ₹100 → they buy the stock at an effective discount (strike – premium collected). 

This works well if the trader doesn’t mind owning the stock. 

When to Initiate a Short Put Trade 

A Short Put trade is best used when the outlook is moderately bullish. The ideal conditions include: 

• High implied volatility (IV): This means higher premiums, enhancing potential returns. 

• Use tools like IV Rank (IVR) or IV Percentile (IVP) to gauge if volatility is currently elevated. 

When IV is high and expected to fall, Short Puts are especially effective. 

Short Puts vs Long Calls 

While both strategies benefit from rising prices, they differ in structure and risk: 

The Short Put thrives in sideways or slow upward movements, while Long Calls require a significant price move upward to be profitable. 

Covered vs Naked Short Puts 

There are two ways to execute a Short Put trade: 

• Naked Short Put: Simply selling a Put without any hedge—higher risk if the market falls. 

• Covered Short Put: Selling a Put and hedging it using a short futures position or a lower strike Long Put. This reduces risk exposure and adds a protective layer. 

Factors to Consider Before Taking a Short Put Position 

1. Impact of Underlying Price Movement 

The price sensitivity of a put option is governed by Delta: 

• If Delta = -0.20, a 100-point move in the underlying will change the option value by 20 points. 

• Traders can select strikes based on expected movement and optimal Delta. 

2. Volatility Considerations 

High IV = Higher Premium = Better entry for option sellers. 

• Use IVR/IVP to time trades. 

• Falling volatility post-entry benefits the trade. 

3. Time Decay (Theta) 

Time decay works in favour of the Short Put trader. As expiry approaches: 

• The premium erodes faster. 

• The probability of retaining the premium increases. 

4. Impact of Stock Price Changes 

• ATM Puts have Delta ≈ -0.50: ₹1 move in stock = ₹0.50 move in option. 

• ITM Puts: Higher Delta, respond more strongly. 

• OTM Puts: Lower Delta, less sensitive to stock price moves. 

5. Volatility Fluctuations 

• Rising volatility increases option premium, hurting Short Put positions. 

• Falling volatility benefits the trade, as the option premium declines. 

6. Time to Expiry 

Time erosion (Theta decay) is the option seller’s friend: 

• The closer to expiry, the faster the decay. 

• Even if price doesn’t rise, the position may profit due to time decay. 

Conclusion 

A Short Put strategy offers a limited reward but a high probability of success. It benefits from time decay and stable or rising markets, making it a reliable tool in many trader toolkits. However, its downside risk is significant, especially in falling markets. 

Used wisely, and preferably on platforms like m.Stock that offer tight spreads and low-cost execution, the Short Put strategy becomes a valuable building block for more advanced options strategies.