What Is A Cash-Secured Put?

Selling a cash-secured put is a strategy in which you sell a contract to another investor, giving them the right to sell you a specific security at a certain price by a certain date. You must also set aside enough cash in your brokerage account to cover the purchase of the security at the strike price.

If the price of the security falls below the strike price and the buyer of the put option exercises their right to sell you the security, you will be obligated to buy the security at the strike price. However, your loss will be limited to the amount of cash that you set aside.

Why Do People Sell Cash-Secured Puts?

There are two main reasons why people sell cash-secured puts:

• To generate income: When you sell a cash-secured put, you receive a premium from the buyer of the option. This premium is your maximum profit, regardless of what happens to the price of the security.
• To hedge against a decline in the price of the security: If you own a security and you are concerned that the price may decline, you can sell a cash-secured put to protect yourself from losses. If the price of the security does decline below the strike price and the buyer exercises the option, you will be obligated to buy the security at the strike price, but your loss will be limited to the premium received minus the drop.

What Are The Risks?

The main risk of selling a cash-secured put is that you may be obligated to buy the security at the strike price, even if the price of the security falls significantly below the strike price. However, your loss will be limited to the amount of cash that you set aside.

The trade-off with cash-secured puts: capped profit (the premium), but potentially large paper loss if the stock craters. That's why strike selection matters more than premium size.

How Do I Sell A Cash-Secured Put?

To sell a cash-secured put, you need to have a brokerage account that allows you to trade options. You must also have enough cash in your account to cover the purchase of the security at the strike price.

Once you have met these requirements, you can place a sell-to-open order for the cash-secured put that you want to write. The order will specify:

• The strike price (the price you're agreeing to buy at)
• The expiration date (when the contract ends)
• The quantity of contracts you want to write (each contract = 100 shares)

Selling A Cash-Secured Put On XYZ Company

Suppose you believe that the stock price of XYZ Company is likely to stay above $100 for the next month. You can sell a cash-secured put with a strike price of $100 and an expiration date of one month. This means that you are agreeing to buy 100 shares of XYZ at $100 per share if the stock price falls below $100 by the expiration date.

To sell this cash-secured put, you must have $10,000 in your brokerage account to cover the potential purchase of 100 shares at $100.

If the stock price stays above $100 by the expiration date, the put option will expire worthless and you will keep the premium that you received when you sold the option. However, if the stock price falls below $100 by the expiration date, the buyer can exercise the option and force you to buy 100 shares of XYZ at $100 per share.

Example: The Math

Let's say that you sell a cash-secured put on XYZ Company with a strike price of $100 and an expiration date of one month. You receive a premium of $1 per share, or $100 for the contract.

Scenario A, Stock stays above $100 at expiration:

• The put option expires worthless
• You keep the $100 premium
• You keep the $10,000 cash you set aside
• Net profit: +$100 (1% return on capital in 30 days)

Scenario B, Stock falls below $100 at expiration:

• The put buyer exercises the option
• You're obligated to buy 100 shares of XYZ at $100 per share = $10,000
• You still keep the $100 premium (your cost basis is effectively $99/share)
• If XYZ is trading at, say, $95, you're holding shares worth $9,500 with a $10,000 cost basis (offset by $100 premium)
• Unrealized loss: -$400 (but you own the stock, which you presumably wanted anyway)

This is why traders often sell cash-secured puts on stocks they actually want to own at the strike price, the worst case is getting a stock they wanted at a discount.

Conclusion

Selling cash-secured puts can be a way to generate income, but it is important to understand the risks involved. If the stock price falls below the strike price, you may be obligated to buy the stock at a higher price than the current market price.

Cash-secured puts work best when combined with income-focused ETFs, disciplined strike selection, and a clear understanding of the underlying you'd actually want to own. Combine that with our analyst upgrades tracker and earnings calendar to time your entries.