Cash-Secured Put

What is a Cash-Secured Put?

A cash-secured put means you sell a put option and keep enough cash in your account to buy the shares if you get assigned. You collect premium upfront, and in exchange you are agreeing to buy 100 shares at the strike price if the stock drops below it by expiration.

It is called "cash-secured" because you have the cash sitting there to cover the purchase. This separates it from a naked put, where you might not have the funds and your broker is taking on the risk.

This is one of the best strategies for beginners who want to start generating income with options.

How to Set It Up

Sell 1 put option at a strike price you are comfortable buying the stock at
Keep enough cash in your account to cover the purchase (strike price x 100)
Strike selection: Sell OTM puts, typically 5-10% below the current stock price. This gives you a margin of safety.
Expiration: 30-45 days is the sweet spot for optimal time decay.

You need the cash reserved. If you sell a $95 put, you need $9,500 in your account to back it up.

When to Use This Strategy

Use cash-secured puts when:

You want to buy a stock anyway, but at a lower price
You are neutral-to-bullish and want income while you wait
You want to get paid for placing a limit order
The stock is at a support level you think will hold

Think of it this way: you are getting paid to wait for a stock to come to you at your price. If it never drops that far, you keep the premium and move on.

Example Trade

Stock XYZ is trading at $100. You would be happy to buy it at $95.

Sell 1 XYZ $95 put expiring in 30 days for $1.50
Premium collected: $1.50 x 100 = $150
Cash required: $95 x 100 = $9,500
Breakeven: $95 - $1.50 = $93.50

Scenario 1: XYZ stays above $95. The put expires worthless. You keep the $150. That is a 1.6% return on your cash in 30 days. Sell another one next month.

Scenario 2: XYZ drops to $92. You get assigned and buy 100 shares at $95. But you collected $1.50 in premium, so your effective cost is $93.50 per share. The stock is at $92, so you are down $1.50 per share on paper. But you wanted the stock anyway and got in at a discount.

Scenario 3: XYZ drops to $80. You buy at $95 (effective cost $93.50) and the stock is at $80. You are down $13.50 per share. This is the risk — the stock can keep dropping.

Risk and Reward

Max profit: The premium you collect. In our example, $150. That is it. You do not make more if the stock goes to $200.
Max loss: If the stock drops to zero, you are buying it at the strike and it is worth nothing. Max loss = (strike - premium) x 100 = $9,350. Realistically, if you pick quality stocks, this is extreme.
Breakeven: Strike minus the premium. $93.50 in our example.

The returns look small as a percentage, but they compound. Selling puts month after month on quality stocks at good levels can generate 12-20% annualized returns.

Tips and Common Mistakes

Only sell puts on stocks you actually want to own. If you would not buy the stock at the strike price, do not sell the put. Period.
Do not chase high premium on garbage stocks. High premiums exist for a reason — the stock is volatile and risky. Stick to quality.
Watch your cash allocation. Each put you sell ties up a chunk of cash. Do not oversell and leave yourself unable to manage positions.
Have a plan if assigned. If you get the shares, immediately start selling covered calls against them. This is how the Wheel strategy works.

Related Strategies

Covered Call — what you do after getting assigned on a cash-secured put
The Wheel — the complete cycle of cash-secured puts and covered calls
Bull Put Spread — a similar bullish credit strategy with defined risk and less capital required