Cash-Secured Puts (Education): How It Works, Rules & Example
A cash-secured put means selling a put option while holding enough cash to buy the shares if assigned. You collect a premium and may end up buying shares at a price you chose in advance.
How it works
- Pick a stock or ETF you would be happy to own.
- Choose a strike price below the current price where you would be comfortable buying.
- Sell the put and set aside enough cash to buy 100 shares at the strike.
- If the price stays above the strike at expiry, keep the premium and the cash.
- If the price falls below the strike, you may be assigned and buy the shares at the strike.
The rules
π Pros
- Earns a premium while waiting to buy at a lower price.
- Defined, cash-backed obligation with no leverage.
- Encourages planned, price-disciplined buying.
π Cons
- You may buy shares that keep falling well below your strike.
- Your upside is limited to the premium if the stock rises.
- Ties up cash that could be invested elsewhere.
Worked example
Common mistakes
- Selling puts on assets you do not actually want to own.
- Selling more puts than your cash can cover.
- Chasing high premiums on very volatile names.
Tools for this strategy
FAQ
Why is it called cash-secured?
Because you keep enough cash on hand to buy the shares if the put is assigned.
What is my break-even price?
It is the strike price minus the premium received.
Is this safer than buying shares outright?
The risks are similar to owning shares from the strike downward, but your upside is limited to the premium.
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