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Covered Put

A Covered Put is a strategy where you short the underlying (e.g., BANKNIFTY Futures) and sell a put option at a lower strike price to earn premium income. It works best when the underlying price is expected to fall slightly but stay above the strike price.

  • Ideal for moderately bearish conditions, where a modest price decrease is expected.
  • Selling a put 1-2% OTM from the current price provides premium income with a lower risk of being exercised.
  • Generates additional income from the premium, with limited upside protection if the price rises.
  • Maximum profit occurs if the underlying closes at or above the strike price, with profit being the premium collected.
  • Risk arises if the price rises significantly, as gains on the futures are capped.

Example:

  • BANKNIFTY trading at 42,000.
  • You short 1 lot of BANKNIFTY Futures (lot size = 25) at 42,000.
  • Sell 41,700 Put (OTM) at ₹120 with a near-month expiry.
  • Outcome:
    1. If BANKNIFTY stays above 41,700 at expiry:
      • The put option expires worthless.
      • You retain the ₹3,000 premium (₹120 × 25).
    2. If BANKNIFTY falls to 41,600 at expiry:
      • Loss on futures = ₹10,000.
      • Net loss = ₹10,000 − ₹3,000 = ₹7,000.
    3. If BANKNIFTY rises to 42,300 at expiry:
      • Profit on futures = ₹7,500.
      • Effective profit = ₹7,500 + ₹3,000 = ₹10,500.
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