Put Options Basics and How They Work in Practice?

• What is a Put Option?
• How Do Put Options Work?
• Buying a Put Option
• Selling a Put Option
• Put vs. Call Option
• How to Trade Put Options in India

What is a Put Option?

• Hedging against a potential decline in an asset's price.
• Speculating on price drops without directly short-selling the asset.

How Do Put Options Work?

• If the price falls below the strike price, the put option becomes more profitable.
• If the price rises above the strike price, the option loses value.

• If an investor holds a stock and anticipates a price decline, they can buy a put option to limit potential losses.
• Traders without ownership of the stock can use puts to create short positions, benefiting from falling prices.

Buying a Put Option

• The buyer can sell the stock at ₹50, making ₹10 per share (₹1,000 for 100 shares).
• After deducting the premium (₹300), the net profit is ₹700.

Selling a Put Option

• If the asset’s price drops below the strike price, the seller must buy it at the strike price, potentially incurring a loss.
• If the price stays the same or rises, the seller keeps the premium as profit.

Put vs. Call Option

• Put Option: Suitable if you anticipate a price drop.
• Call Option: Ideal for scenarios where you expect the price to rise.

How to Trade Put Options in India

1. Open a trading and Demat Account with brokers like RMoney.
2. Choose from a range of derivatives available on indices (e.g., Nifty, Sensex) and specific stocks.
3. Execute your trades through the exchange’s derivatives segment.

FAQs

Q1. What happens when you execute a put option?

Q2. When should you exit a put option?

Q3. What happens if you don’t sell options on expiry?

Q4. Is it better to exercise or sell an option?

Q5. How much can you lose on a put option?

Q6. Can you exercise a put option before expiration?

Conclusion