How to Profit from a Short Put Bullish Option

Traders utilize the bullish short put options trading technique when they are sure that the value of a security will rise. The strategy is most beneficial only to make a set amount of profit, and it's best employed when you predict a security's value to increase by an insignificant amount.


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What is a Bullish-Short Put Option?

A short put, uncovered put, or a naked put is when an investor writes a naked option; and buys shares of the underlying security if the put option buyer executes the option.

The short put holder suffers a significant loss if the underlying price falls below the strike price of the short put option before the buyer exercises or the option expires.

How Does the Bullish-Short Put Options Work?

When a deal begins selling a put, it is a short put. The writer (seller) is compensated (premium) for this action by writing an option, and the option writer's profit limits itself to the premium obtained.

Selling a put option to initiate a position is not the same as buying an option and then selling it. The sell order is used to close a position and lock in a profit or loss, and the sell (writing) in the former opens the put position.

When a trader initiates a short put, they likely believe the underlying price will remain above the strike price of the written put. If the underlying price remains above the strike

When a trader initiates a short put, they likely believe the underlying price will remain above the strike price of the written put. If the underlying price remains above the put option's strike price, the option will expire worthlessly, and the writer will keep the premium. The writer suffers losses if the underlying price falls below the strike price.

Some traders also use short puts to purchase the underlying securities.

The Opportune Time For the Bullish-Short Put Option

The short put is an excellent trading strategy to use when the prediction is for the stock price to rise. The right time to use the process is when the expected rise is marginal because you can only make a set amount of profit. Interestingly, the short-put bullish strategy is that you can earn even if the security's price does not move. This is because the short put includes the sale of options contracts, and you can profit from the fact that time decay diminishes the value of those contracts over time.

This technique provides no meaningful protection against the underlying security falling significantly in value, so employ it only if you know for sure that the security will dramatically decrease in value.

Implementation of the Short Put Strategy

You can implement the short put strategy with a relatively simple transaction. Issue a sell-to-open order with your broker to write puts on the underlying security whose price you predict to rise. You are entering a short position on options you do not already hold by selling them.

You would generally write put options close to the money and have a short expiration date. You don't need the underlying security's price to climb significantly, and there isn't much time for the price to decline, costing you money.

To maximize your potential earnings, you could write more expensive in the money puts with a higher strike price, but the security's price would have to rise more for the contracts to expire out of the money. Even if the price decreased significantly, you could write down the profit, but they would be less expensive and yield less return.

There is no definite rule on whether to write contracts at the money, out of the money, or in the money, and the decision is yours. Contracts are likely the ideal middle ground in the money because they provide a reasonable profit possibility while not requiring the underlying security to move much.

Maximum Profits from Using the Short Put Strategy

When you write the puts, you effectively get your earnings upfront. Such transactions because you will receive money into your brokerage account for writing them, this transaction results in a net credit. This net credit is the most significant profit you can make. If the puts you write are worthless when those expire, you have no further liability, and the cash you received is all profit.

Also, if the contracts are worthless, then when you write them, they will expire. You can then utilize the buy-to-close order to repurchase them. If you do this, your profit will be the difference between the original credit and the amount spent to repurchase them. You can raise the possible profits placed by writing in the money puts for a more considerable net credit. Still, the underlying security's price must increase for these contracts to expire worthlessly.

Potential Risks of Short Put Bullish Strategy

The risk is that the underlying security's price decreases and the puts you purchased are assigned. If this occurs, you are obligated to buy the underlying security at the agreed-upon strike price, regardless of where the asset is trading. As a result, the short put is a dangerous technique. If the security falls suddenly, your losses may be substantial compared to the amount you earned for writing the puts.

If you write out your money put, you may still earn even if the underlying security's price falls slightly. However, because out-of-pocket options are less expensive, you will make less from the initial credit. We would not recommend the short put for beginners due to the hazards involved, and we would encourage you to employ this approach only if you know what you are doing.

Example of Short Put Buliios 

The maximum risk is proportional to the difference between the strike prices and the net credit after the deduction of commissions. The difference between the strike prices in the example below is ₹10.00 (200.00 – 190.00 = 10.00), while the net credit is ₹3.80 (6.40 – 2.60 = 3.80). As a result, the maximum risk is ₹6.20 (10.00 – 3.80 = 6.20) per share, with fewer commissions. This entire risk realization if the stock price at expiration equals less than the short put's strike price.

Example Of Bull Put Spread

Sell 1 ABC Put at 

6.40

Buy 1 ABC put at

2.60

Net Credit

3.80

It is better to allocate short puts at expiration when the stock price is less than the strike price. However, there is a chance of an early allocation. 

At expiration, the stock price must have reached its breakeven point.

Short put strike price (higher strike)- net premium received

In this case, 200.00 minus ₹3.80 equals ₹197.20

Short 1 200 put at ₹6.40 Long ₹3.90  put at (2.60) Net credit =₹3.80

 

Profit & Loss Table for Bull Put Spread

 

Short 1 200 Put at 

6.40

Long 1 190 Put at

2.60

Net Credit

3.80

Stock Price at Expiration

Short 200 Put Profit/(Loss) at Expiration

Long 190 Put Profit/(Loss) at Expiration

Bull Put Spread Profit/(Loss) at Expiration

208

+6.40

(2.60)

+3.80

206

+6.40

(2.60)

+3.80

204

+6.40

(2.60)

+3.80

202

+6.40

(2.60)

+3.80

200

+6.40

(2.60)

+3.80

198

+4.40

(2.60)

+1.80

196

+2.40

(2.60)

(0.20)

194

+0.40

(2.60)

(2.20)

192

(1.60)

(2.60)

(4.20)

190

(3.60)

(2.60)

(6.20)

188

(5.60)

(0.60)

(6.20)

186

(7.60)

+1.40

(6.20)

184

(9.60)

+3.40

(6.20)

Pros and Cons of the Short Put Bullish Strategy

There are certain benefits to utilizing the short put spread, but several drawbacks are also. 

  • The fact that you will receive an upfront credit is one of the unique benefits, but this partially offsets because the approach will demand margin, which means you will have to tie up funds in your brokerage account.

  • You will also often need a high trading level, which will rule out the approach for many traders. It is, nevertheless, quite essential and is the preference of traders due to its ease of use and minimal commission fees.

  • Another advantage is that it provides the opportunity for profit even if the underlying security's price remains unchanged, making it a suitable choice if you aren't confident the price will rise. However, the strategy's potential earnings are restricted, and if the underlying security's price increases significantly, you will not receive any additional returns.

  • You are also exposed to huge losses if the underlying security's price falls dramatically. However, you can easily repurchase the options if this appears to be the case.

Conclusion

 In a rising or range-bound market, puts can be a consistent source of revenue. However, you could execute it cautiously because the potential losses might be extensive if the stock price/index declines. The thing to remember here is when the intelligent use of the short put bullish strategy can be an income-generating strategy.