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Cash-Secured Puts – “Put” Your Money Where Your Mouth Is

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Introduction

 

 

Cash-secured puts may offer the investor various incentives to purchase a stock. This strategy allows the investor to not only look for an opportune time to purchase a stock, but it can also give you the advantage of purchasing stocks at a discount, with extra money to spare – a win-win scenario for all parties involved. In this lesson, we will be going over the basics of cash-secured puts, in addition to how and when to use the cash-secured put in your favor.

 

 

But before we begin, we would like you to read and agree to the Terms & Conditions of this post before you proceed any further.

Disclaimer: Invest In Wall Street is in no way financially or legally responsible for any investing decisions made by any of our readers and are, in turn, acting on their own free will. The information in this article is purely educational and should not be abused or misconstrued in any way, shape, or form.

 

 

Cash-Secured Puts

 

Selling cash-secured puts can be a way to buy stock at a discounted price or create income.

A cash-secured puts is a short put position, that is a theta positive strategy – which means it allows an investor to earn income from time decay. In this sense, it’s a lot like a covered call.

 

 

A covered call requires the investor to own the stock as a way to reduce risk.

When selling a cash-secured put, you reduce risk by having enough cash on hand to buy the stock if you’re assigned.

There  are other similarities between cash-secured puts and a covered call. A covered call has a finite amount of risk equal to the price of the stock minus the premium bought in for selling the call. A cash-secured put has exactly the same risk profile, and the same finite amount of risk.

Trading A Cash-Secured Put

 

 

So when would you trade a cash-secured put?

There are two likely scenarios where this strategy would make sense:

One you can sell it hoping to eventually own the stock – or two, you can collect income from the option premium.

In either scenario, the stocks you choose should be uptrending, or at least moving sideways.

Depending on which strike price you choose to sell, the cash-secured put can yield a high probability of having the stock assigned to you, or could simply expire worthless.

 

 

The difference is what you intend for your strategy to accomplish. Here’s a couple of considerations.

As mentioned before, cash-secured puts are theta positive, so time decay works in your favor, on the other hand, cash-secured put strategies are theta negative as well, so increases in volatility work against you. Now back to the strategies.

First, you could use a cash-secured put as a means to purchase stock shares.

To do this, first choose a stock you that you’d like to own. This sounds obvious, but it’s a good idea to confirm that the stock meets your purchase rules and criteria.

Next, choose a strike price to sell that is at or near the money. These strikes increase the probability that you’ll be assigned the stock, but they also pay the highest extrinsic value.

Monitor the stock price as expiration approaches to make sure you still want to purchase the stock at that strike price. If the option expires at, or in the money, you’ll be assigned the stock – which simply means you’ll buy the stock at the strike price.

The bonus is that you received a premium for the put when you sold it, so it’s a little like buying the stock at a discount.

 

 

The next strategy, trading cash-secured puts for income, is a little different.

In this case, your goal is to have the put option expire out of the money – with the expectation that the stock will not drop to the strike price before expiration.

You would begin this strategy by choosing a strike that is out of the money, as this decreases the probability that you’ll be assigned the stock. It also reduces your premium for what it would be if you sold the “at the money strike”.

If possible, you want to consider selling a strike that is below a support level, or has a delta of thirty or less.

Next, monitor the stock’s price. If the stock price is near the strike price within twenty days of expiration, consider exiting the position by buying the put option back.

If your option’s within four to ten days of expiration, and most time value has decayed, consider exiting the position.

Remember that anytime you sell an option, you may have an obligation. You could also have the stock assigned to you even if your option is out of the money.

That’s why it’s important that these are cash-secured puts, and that you have the capital in your account to buy the stock if it’s put to you.

 

 

Quick Recap

In Review….

Cash-Secured Puts

 

  • Selling cash-secured puts can be a way to buy stock at a discounted price or create income
  • A cash-secured puts is a short put position, that is a theta positive strategy – which means it allows an investor to earn income from time decay. In this sense, it’s a lot like a covered call
  • When selling a cash-secured put, you reduce risk by having enough cash on hand to buy the stock if you’re assigned
  • There are other similarities between cash-secured puts and a covered call. A covered call has a finite amount of risk equal to the price of the stock minus the premium bought in for selling the call. A cash-secured put has exactly the same risk profile, and the same finite amount of risk

 

 

There Are Two Common Ways To Trade The Cash-Secured Put

 

  1. Sell it hoping to eventually own the stock
  • To do this, first choose a stock you that you’d like to own. This sounds obvious, but it’s a good idea to confirm that the stock meets your purchase rules and criteria
  • Next, choose a strike price to sell that is at or near the money. These strikes increase the probability that you’ll be assigned the stock, but they also pay the highest extrinsic value
  • Monitor the stock price as expiration approaches to make sure you still want to purchase the stock at that strike price. If the option expires at, or in the money, you’ll be assigned the stock – which simply means you’ll buy the stock at the strike price
  • The bonus is that you received a premium for the put when you sold it, so it’s a little like buying the stock at a discount

 

2. Collect income from the option premium

  • In this case, your goal is to have the put option expire out of the money – with the expectation that the stock will not drop to the strike price before expiration
  • You would begin this strategy by choosing a strike that is out of the money, as this decreases the probability that you’ll be assigned the stock. It also reduces your premium for what it would be if you sold the “at the money strike”
  • If possible, you want to consider selling a strike that is below a support level, or has a delta of thirty or less
  • Next, monitor the stock’s price. If the stock price is near the strike price within twenty days of expiration, consider exiting the position by buying the put option back
  • If your option’s within four to ten days of expiration, and most time value has decayed, consider exiting the position

 

 

 

These are the reasons as to why investors and traders alike may use cash-secured puts – to either help them buy a stock or to generate revenue in the form of a premium.

A cash-secured put, like we have previously described above, is very similar to that of a covered call in terms of risk and reward. However, it is important to know that a covered call is when you sell a call (short call position) with a stock that you already own – while a cash-secured put is when you sell a put (short put position) for a stock that you may or may not like to own – and will also have to have enough capital on hand if assigned. Both strategies, however, allows the investor the “option” of collecting additional income in the form of a premium.

It is important to know that trading binaries involves a great deal of investing expertise – in addition to more capital. Do not try to trade strategies that you do not understand and make sure to have a soundproof plan in place before attempting to invest in options.

I hope you have enjoyed this post and found the information to be quite useful. If you have any questions or concerns, please feel free to leave them down in the comment thread below and make sure to like and share this post.

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