Short Put Options Trading Strategy
What is short put option strategy?
A short put is the opposite of buy put option. With this option trading strategy, you are obliged to buy the underlying security at a fixed price in the future. This option trading strategy has a low profit potential if the stock trades above the strike price and exposed to high risk if stock goes down. It is also helpful when you expect implied volatility to fall, that will decrease the price of the option you sold.
When to initiate a short put?
A short put is best used when you expect the underlying asset to rise moderately. It would still benefit if the underlying asset remains at the same level, because the time decay factor will always be in your favour as the time value of put will reduce over a period of time as you reach near to expiry. This is a good option trading strategy to use because it gives you upfront credit, which will help to somewhat offset the margin.
|Strategy||Short Put Option|
|Market Outlook||Bullish or Neutral|
|Breakeven at expiry||Strike price - Premium received|
|Reward||Limited to premium received|
Let’s try to understand with an Example:
|Current Nifty Price||8300|
|Premium received (per share)||80|
|BEP (strike Price - Premium paid)||8120|
Suppose Nifty is trading at Rs. 8300. A put option contract with a strike price of 8200 is trading at Rs. 80. If you expect that the price of Nifty will surge in the coming weeks, so you will sell 8200 strike and receive upfront profit of Rs. 6,000 (75*80). This transaction will result in net credit because you will receive the money in your broking account for writing the put option. This will be the maximum amount that you will gain if the option expires worthless. If the market moves against you, then you should have a stop loss based on your risk appetite to avoid unlimited loss.
So, as expected, if Nifty Increases to 8400 or higher by expiration, the options will be out of the money at expiration and therefore expire worthless. You will not have any further liability and amount of Rs. 6000 (75*80) will be your maximum profit. If Nifty goes against your expectation and falls to 7800 then the loss would be amount to Rs. 24000 (75*320). Following is the payoff schedule assuming different scenarios of expiry. For the ease of understanding, we did not take into account commission charges and Margin.
Analysis of Short Put Option Trading Strategy
A short put options trading strategy can help in generating regular income in a rising or sideways market but it does carry significant risk and it is not suitable for beginner traders. It’s also not a good strategy to use if you expect underlying assets to rise quickly in a short period of time; instead one should try long call trade strategy.
What Stocks/Shares (Equity) Are And How Do Shareholders Make Money?
Jargon is the biggest hurdle to every new investor, particularly when it comes to those who want to invest in stocks. For that reason, it's important that before someone starts focusing on losses and gains, or the BSE versus the NSE, it's important to understand what stocks really are and what they represent. You can't make any money until you grasp the fundamentals of the tools you're working with, after all.
Put simply, stocks represent a share in a company. If someone goes online and buys a share of ONGC stock then that individual now has a stake in how well ONGC does. If the company does well, the investor does well. If the company does poorly, then the investor can lose money. How much one stands to gain or lose depends on how much stock that person has in the company, and how that particular company performs.
Let's use an example to make this a little bit clearer. Say that Company ABC wants to attract investors. As such it divides itself up into 5,00,000 shares of stock. For every person who buys stock, that money goes to the company so it can hire new employees, build new stores and generally attempt to get a bigger share of the market. Seen this way, it's clear that trading stock is great for the company. but how do you, the investor, make money?
Method 1: Make Money Trading Stocks
Trading stocks is the most well-known way to make money on the stock market. The price of a stock is liquid, climbing and falling within the space of days or even hours. The trick to make money as a trader is to buy the stock when its price is low, and to sell it when the price rises. So, say that a stock broker heard Reliance Industries is claiming a bigger part of the market and it's poised to rebound from a slump. He or she might buy stock at Rs.50 a share, and wait. If the stock goes up then the broker can sell it at a profit. So if the stock climbs to Rs.90 a share the broker has made a Rs. 40 per share profit. That's not terribly impressive for a single share, but if the broker purchased 100 shares, or 1,000 shares then that profit is going to go up pretty quickly.
It doesn't matter whether you hang onto a stock for an hour, a year or a decade; if you sell it for more than you paid for it you made a profit.
Method 2: Making Money With Stock Dividends
When someone is a stockholder in a company, that company's profits are also the stockholder's profits. The increasing value of a stock is just one instance of this. Another may be dividends paid to shareholders by the company. In plain English, that means that every quarter the company will take a segment of its profits, split it up and give those profits to stockholders according to how much stock someone has. The more profit the company makes, the more money the stockholder gets paid at the end of the quarter. The ideal situation for you to be in is to hold stock in a company that pays dividends, and which is making record profits. If you hold onto your shares then as long as the company is making money, you're making money. In essence you're being paid to own the stock, because when you bought it you paid for a share of the company. That share of the company comes with your own little piece of the profits pie.
Important Points you should see before investing in shares
An individual invests in a stock in order to earn profit. It is very disheartening when you invest your hard-earned money in a stock which doesn’t give you desired returns. It is really important to do all the research before you choose to invest in a particular stock.
Here are a few things to check before you choose to invest in a stock.
1. Company background
Read about the company that you want to invest in. Find out what their business is. Visit their website, read news articles related to the company.
2. Financial performance of Company
It is important to analyse the past performance to understand how the company has grown over the years. Read the balance sheets to see how their balance sheets have grown in the past.
3. Stock value
There are ways to find out whether a stock is over or undervalued. Some basic methods would include Price to Earning ratio (P/E ratio), Price to Sales Ratio that helps one understand if the market value of the stock is in line with the growth trends of the company.
4. Industry outlook
Read about the competitors and peers of the company. Finds out what competitive edge your company has over the others. Find out if the advantage is sustainable. Find out about the market share, and overall performance of the industry that they operate in. Look for regulatory, political factors that may impact the industry.
5. Promoter check
Always read about the people who are running the company. Find out their background and how long they have spent with the company. Frequent changes in the top management, inexperienced top managers may be poor indicators while picking the right stock.
The ABC’s of Investing
The money that you earn is partly spent and the rest is saved for a rainy day. Savings refer to the funds that are kept aside in safe custody, such as a savings account. Instead of keeping this money idle, you can invest your savings in various financial instruments which will pay you a hefty return in the near future.
The question that arises now is how and where to invest this money. Potential investors can always take the help of a financial advisor and an investment advisor, both of who are capable of providing detailed knowledge on the subject on investment and investing money. Investors can start investing after fulfilling the following simple steps:
- Obtaining documents relating to Personal Identification Proof and Address Proof.
- Approaching intermediaries like a broker, RM etc.
- Filling up the KYC form and furnishing the details required.
- Filling up of the broker-client agreement.
- Opening a DEMAT Account and linking it with a savings account.
As soon as these steps are completed, an investor can start investing in the financial market.
The investment options can be well classified into 2 parts. They are:
- Physical assets: It comprises of tangible items like real estate, commodity, goldand silver in the form of jewelry and even antiques.
- Financial assets: It comprises of FDs with banks, small savings instruments with the post offices, provident fund, pension fund, money market instruments and capital market instruments.
The money market gives the scope of short term investment options. It deals with debt instruments such as bills of exchanges, commercial bills, treasury bills, certificate of deposits etc. These have relatively low risk and relatively low returns. However, they are one of the safest investment options, especially for those investors who want to play safe.
A capital market is an option for long term investment. The various instruments of capital market are shares of companies (equity), mutual funds, SIP investment, derivatives market, IPOS, etc. These have a higher risk and higher returns in comparison to the instruments of the money market. Although stock investing is considered to be more rewarding, the high risk factor associated with it can result in loss if there is a downswing in the activities of a company.
The investment strategies of an individual depend on certain factors, such as:
- The risk taking appetite of investor
- The time horizon of investment
- Expected return
- Need for investment
Investments make our fund grow over a period of time whereas savings is just idle cash. Our short term needs can be fulfilled with the help of our savings but for the achievement of our long term financial goals, investment is a must. This is only possible with financial planning.
What is the right age to buy a term life insurance cover?
Death comes knocking at the door without any prior notice. The death of the only breadwinner of the family brings the family into severe financial crisis. This is the time when you realise the importance of a term insurance policy the most. A term insurance plan secures the life of your loved ones and helps them to meet their day-to-day expenses. It is always better to buy a term insurance plan early in life as an individual gets immense benefits for starting early. Also, the premium charges are also low when you are young.
Let’s take a look at the different ages and factors that one should consider while buying a term insurance.
During the 20s, an individual just steps into his professional life and is relatively debt free. He has lesser family responsibilities and buying a term cover at this age can help him pay off his education loans if any. Moreover, term insurance premiums are less expensive when an individual is young.
An individual, in his 30s, tend to have family and kids. While his income is higher at this age, the responsibilities are much more. He may have financial liabilities like home loan, car loan etc. The premium will tend to be slightly higher, given the family responsibilities.
During this age, an individual’s long term financial liabilities like a home or car loan is paid-off. However, he may have higher responsibilities like his child’s higher education or his own retirement planning. It is better to opt for a cover which provides a greater coverage and financial protection. The cover should be able to take care of your family expenses after your death.
When an individual reaches this age, his children already start earning and most of the debts are paid-off. Family members are not financially dependent on your earnings. During this age, what an individual is most concerned about is his retirement. At this age, the best option for an individual is to buy an endowment plan which will help him save and give him a lump sum amount on maturity.
Term Insurance Premium amounts for a cover of Rs. 50 lakh
The above table shows the difference in premiums as per the age of an individual. As the age increases, premium increases.
Age plays a major role in deciding the amount of your term insurance. The biggest mistake an individual makes is to not opt for a substantial cover for the family. One should make sure that the term cover takes care of all the basic necessities of the family in case of the sudden demise of the policyholder.
Tax Saving Investments and their Features
This is the time of the year when you start getting calls from the HR of your company asking for investment declarations. If you have not made any investments yet, here is the list of instruments where you can invest.
|Instrument||Investment||Section of IT Act||Lock-in Period||Returns||Risk||Taxation at Maturity|
|ELSS||ELSS is a type of mutual fund scheme where most of the fund corpus is invested in equities or equity-related products.||80C||3 years||Not fixed, depend upon the performance of equity market. However, in the past, ELSS has given average returns of 12-14%.||Carries some risk||Tax-free|
|PPF||It is a type of investment which is provided by the Government of India||80C||15 years||The rate of returns changes as per government policies.
Current returns - 8.1% compounded annually
|NSC||NSC are bonds issued by the government for small savings and one can purchase these bonds from post offices.||80C||10 years||The interest rate on NSC is decided by the government every year. It is linked to the yield of 10-year government bonds.
The current interest rate is 8%.
|Low Risk||Interest is Taxable|
|Pension Mutual Funds||Pension Mutual Funds invest 40% of the money in equity and 60% in debt instruments.||80C||Until you reach the age of 58||The returns in pension mutual funds are not fixed as it depends on the performance of the equity and debt market. Pension mutual funds have given an average return of 8-10% for a 5-year and 10-year period.||Carries some risk||Tax-free|
|Tax Saving FD||It is a special fixed deposit made with any bank.||80C||5 years||The interest rate varies from one bank to another. It usually ranges from 6.5-7.5%.||Risk Free||Interest earned is taxable|
|Rajiv Gandhi Equity Saving Scheme||Exclusively for first time retail investors. Individuals with an annual income below Rs. 12 lakh can invest.||80CCG||3 years||Depends on the performance of equity markets.||Carries some risk||50% of the invested amount|