Cash secured puts are a conservative options strategy that generates income while potentially allowing you to purchase stocks at a discount. When you sell a cash secured put, you collect an immediate premium in exchange for the obligation to buy 100 shares of a stock at a predetermined price (the strike price) if the option is exercised. The “cash secured” aspect means you must maintain sufficient cash in your account to fulfill this obligation – if you sell a put with a $50 strike price, you need $5,000 available to purchase 100 shares if assigned.
What Are Cash Secured Puts?
A cash secured put is an options strategy where you sell (write) a put option while holding enough cash in your account to purchase the underlying stock if assigned. This strategy generates income through the premium collected when selling the put, while potentially allowing you to acquire stocks at a discount to the current market price.
How Cash Secured Puts Work
When you sell a cash secured put, you’re making a commitment to buy 100 shares of a stock at a specific price (the strike price) by a certain date (the expiration date). In exchange for this obligation, you receive an immediate premium payment from the option buyer.
The “cash secured” part means you must have enough cash in your account to cover the full purchase price of 100 shares at the strike price. For example, if you sell a put with a $50 strike price, you need $5,000 in cash ($50 × 100 shares) set aside.
Possible Outcomes at Expiration
Scenario 1: Stock Price Stays Above Strike Price
If the stock price remains above your strike price at expiration, the put expires worthless. You keep the entire premium as profit and your cash is freed up to use for another trade. This is the ideal scenario for income generation.
Scenario 2: Stock Price Falls Below Strike Price
If the stock price falls below your strike price, you’ll be assigned and must buy 100 shares at the strike price. Your effective purchase price is the strike price minus the premium received. While you now own the stock at a higher price than the current market value, you acquired it at a discount thanks to the premium.
Example Trade
Let’s say XYZ stock is trading at $52, and you sell a weekly $50 put expiring in 7 days for a $0.50 premium:
- Cash Required: $5,000 (to secure 100 shares at $50)
- Premium Collected: $50 (100 shares × $0.50)
- Return on Risk (ROR): 1% for 7 days ($50 / $5,000)
- Annualized ROR: 52.14% (1% × 52.14 weeks per year)
If XYZ stays above $50: You keep the $50 premium, achieving a 1% return on your secured cash in one week. This seemingly small weekly return compounds to an impressive annualized rate.
If XYZ falls to $48: You buy 100 shares at $50, but your effective cost basis is $49.50 ($50 strike – $0.50 premium), which is still above the current price but better than buying at $50 without the premium.
Benefits of Cash Secured Puts
Income Generation: Collect premium income regardless of whether you’re assigned the stock.
Lower Entry Price: If assigned, you acquire the stock at a discount equal to the premium received.
Defined Risk: Your maximum loss is known upfront – it’s the strike price minus premium, multiplied by 100.
Control Over Entry: You choose the strike price, effectively setting your desired purchase price for the stock.
Risks and Considerations
Opportunity Cost: Your cash is tied up securing the put and cannot be used for other investments.
Assignment Risk: You must be prepared to own the stock if assigned, including the risk of it continuing to decline.
Limited Upside: Your profit is capped at the premium received, even if the stock soars.
Early Assignment: While rare, American-style options can be assigned before expiration.
Best Practices
Sell puts on stocks you want to own: Only use this strategy on quality companies you’d be happy to hold long-term at the strike price.
Choose appropriate strike prices: Select strikes at prices where you’d genuinely want to buy the stock, typically below current market price.
Monitor time decay: Theta (time decay) works in your favor as a put seller, accelerating as expiration approaches.
Consider market conditions: Higher volatility generally means higher premiums, but also greater risk of assignment.
Have an exit plan: Know what you’ll do if assigned – will you hold the stock, sell covered calls, or exit the position?
When to Use Cash Secured Puts
This strategy works best when:
- You’re bullish to neutral on a stock
- You want to generate income from your cash position
- You’d like to own the stock at a lower price
- Market volatility is elevated (higher premiums)
- You have the patience and capital to potentially own the stock
Rolling Positions
If your put is in-the-money near expiration and you don’t want to be assigned, you can “roll” the position by:
- Buying back the current put (closing the position)
- Selling a new put with a later expiration date
- Ideally collecting a net credit on the roll
This extends your obligation but gives the stock more time to recover above your strike price.
Tax Considerations
Premium income from cash secured puts is typically taxed as short-term capital gains (ordinary income rates) unless the position is held for more than a year, which is rare. If assigned and you later sell the stock, your holding period for the stock begins on the assignment date, not when you sold the put.
Always consult with a tax professional for advice specific to your situation.