Cash-Secured Put

Overview

Ever wished you could get paid while waiting to buy a stock at your target price? That's exactly what the Cash-Secured Put strategy lets you do! It's like placing a limit order to buy shares, but instead of just waiting around, you collect a premium for your patience.

Here's how it works: you sell a put option (creating an obligation to buy shares at the strike price), and you set aside enough cash to fulfill that obligation if needed. It's called "cash-secured" because you're not borrowing money – you've got the funds ready to go if the stock gets put to you.

Key Characteristics

• Market Outlook: "I wouldn't mind owning this stock, especially at a discount"
• Risk: You could end up buying a falling stock (but you were willing to buy it anyway, right?)
• Profit Potential: Limited to whatever premium you collect for selling the put
• Breakeven Point: Strike price minus the premium you collected

When to Use

The Cash-Secured Put might be your strategy of choice when:

• You've got your eye on a stock but think it's a tad overpriced right now
• You've got cash sitting around earning next to nothing in your brokerage account
• You want to generate some income while waiting for a buying opportunity
• You're the type who sets limit orders anyway, so why not get paid for your patience?

Real-World Example

Let's walk through this with a concrete example. Say XYZ stock is trading at $50, but you'd be happy to buy it at $45 – you think that's a fair value.

• You sell a put with a $45 strike price expiring in a month and collect $2 per share ($200 total)
• You set aside $4,500 in your account to cover the potential purchase (that's the "cash-secured" part)
• Now you wait and see what happens over the next month

Three possible outcomes await:

• Best case: XYZ stays above $45, your put expires worthless, and you pocket the entire $200 premium. Free money!
• Middle case: XYZ drops to $44, you get assigned and buy 100 shares at $45. Your effective purchase price is $43 ($45 - $2 premium), so you're still getting a better deal than today's $50 price.
• Worst case: XYZ plummets to $35, you still have to buy at $45. Ouch! But remember, you were willing to buy at $45 anyway, and your effective cost is $43 thanks to the premium.

The Good Stuff

• You get paid while waiting for a stock to hit your target buy price
• If you end up buying the shares, you get them at an effective discount (strike price minus premium)
• It enforces discipline in your buying strategy – no more emotional purchases!
• Higher probability of making at least some profit compared to buying options
• You can repeat the strategy if the put expires worthless, generating ongoing income

The Not-So-Good Stuff

• Ties up a chunk of capital that could be deployed elsewhere
• Your upside is capped at the premium received (no matter how high the stock goes)
• You could end up buying a stock that's in free-fall (catching a falling knife)
• If the stock skyrockets, you'll be kicking yourself for not just buying it outright
• Requires more attention and understanding than a simple limit order

Playing It Smart

• Only sell puts on quality stocks you genuinely want to own – this isn't just about collecting premium
• Choose strike prices that represent true value to you – where would you buy anyway?
• Be extra cautious around earnings announcements or major news events
• Have a plan for what you'll do if the stock drops far below your strike price
• Spread your risk by selling puts on different stocks rather than multiple contracts on one stock
• Consider rolling your put to a later expiration if the stock is approaching your strike price and you're not ready to buy