What is a Cash-Secured Put? | Cash-Secured Put Strategy
Updated: 5 days ago
Cash-secured puts are one of the best ways to learn about options trading.
What is a Cash-Secured Put?
If you are new to options and are unsure where to start, you are not alone. There are tons of resources about options online, and it can be hard to string everything together initially. I recommend that beginner options traders start by trading cash-secured puts.
The cash-secured put (CSP) strategy is simple to understand because you are just promising to buy shares of stock at a specific price. If you know how to buy 100 shares of stock, you essentially understand how a cash-secured put works.
The only difference is that when you sell a put, you collect a cash premium in exchange for your promise to buy 100 shares.
If you promise to buy SPY shares at 350/share by selling a cash-secured put, you will also be paid a 4.45 per share premium, or $445. Regardless of what the stock does, you will always collect the full premium and receive 100 shares at 350/share in your account if assigned.
Upon assignment, you will see 100 shares of SPY and a cash balance of $445, not including commissions, in your account. This sounds great now, but if SPY is trading at 300 when this happens, you will be down $5,000 on the shares.
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Why the cash-secured put strategy is excellent for beginners
If you are buying options, you should know that they will lose value each day due to the nearing of the expiration date. The time decay effect is called theta.
If you own an options contract and take it to expiration, there is a chance you will lose all of your money. If the option is out of the money (OTM) at expiration, it will expire worthless at 0. This is why it can be dangerous for beginners to buy options for swing trading.
The worst-case scenario with a cash-secured put is the ownership of the stock. You can hold a stock forever, and there is a good chance it won't go to 0. Selling cash-secured puts on ETFs like $SPY is especially safe because you are investing in a basket of stocks.
If you get assigned shares of a stock you sell a put on, you can even sell covered calls against the 100 shares. I talk about covered calls in other posts that I will leave linked below.
Example of a Cash-Secured Put
The cash-secured put strategy is easy to understand if we examine an example. Let's say the stock $MSFT is trading at $200 per share. You can promise to buy 100 shares of it at $180 per share and collect a premium by selling a cash-secured put with a strike price of $180.
If $MSFT stays above your strike price of $180 at expiration, you will keep the premium and not have to buy the shares. However, if $MSFT falls below your strike price of $180, you may have to purchase 100 shares of $MSFT at $180 per share and still keep the premium.
Cash-Secured Put Strategy vs. Buying a Call
Buying a call option and selling a cash-secured put are similar trades, but they have critical differences. Buying a call option is a speculative bet that a stock will increase in price before the expiration date.
On the other hand, a cash-secured put is a promise to buy shares of stock. The critical difference is that shares of stock do not expire while the call option does. Therefore, if the stock does not rise before the expiration you pick, you can lose all of your money as the buyer of a call option.
Bottom line | Cash Secured Put Strategy
Selling cash-secured puts is probably the most successful options trading strategy. If you manage your risk and are trading a strategy with a positive EV, you should make a profit over many occurrences.
The cash-secured put strategy is not any riskier than purchasing 100 shares of stock. Selling puts is only risky if you use margin and sell more puts than you can afford. If you are using margin and the stock market crashes, you will likely be forced to close your options at a loss and won't have enough capital to accept assignment.
Cash-secured puts are the first step to the options wheel strategy. Once you are assigned 100 shares from a cash-secured put, you will sell a covered call to complete the wheel strategy.
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