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What is a Cash-secured Put

Triston Martin

Feb 19, 2024

A cash-secured put refers to an income options technique that allows an investor to sell put options on a stock while saving the cash necessary to purchase that stock if the stock price falls below the put option's strike price and the investor is assigned the option.

Investors who think a stock's price may fall in the short term before rising over the long term may find a cash-secured puts strategy handy. It enables the investor to establish a stock position at a lower cost than when the trade begins, select the price (exercise price) at which they will purchase the shares if assigned, and make money on selling the put.

How Do Cash-secured Puts Work

When investors sell the cash-secured puts, they receive a premium right away. Cash-secured puts strategy allows investors to sell cash-secured puts attached to stocks they do not own that they anticipate will appreciate over the long run but decline in value over the short term.

If the market value of the stocks falls than the exercise price, the put contract may further stipulate that the investor buy the security before the exercise date. The investor must still buy the stocks at the exercise price even if the market price is less than the target price on the exercise date.

The investor is not required to buy the stock, and the put expires if the stock's market value is higher than the specified price at the exercise date. In this case, the investor has gained from the trade or, in options jargon, acquired the premium amount.

Investors must have sufficient funds in their brokerage account to pay the purchase price. It is a cash-secured put because the investor must keep that money in their trading account for the period they hold the puts.

Some investors only want to benefit from the options premium and do not intend to buy the underlying stock. In such a scenario, they would often write a short put, which frees them from having to keep the funds on hand to buy the stock.

The investors might expect the cash-secured put to expire without requiring them to buy, allowing them to keep the premium. Investors who want to buy the underlying stock on or before the exercise date at their desired price can consider cash-secured puts.

Although selling cash-secured puts has several advantages and can be profitable, investors should be cautious about the risks before using this investing strategy.

How to Sell a Cash-Secured Put

Call options and Put options allow investors to earn, but not by holding the underlying securities or asset and expecting it to increase, but rather by carefully choosing put options contracts to benefit from asset price changes.

Similarly to short-selling stocks, how investors use put options represents their opinion of whether the asset value is likely to go up or down,

A bullish options trading method known as "selling cash-secured put" entails selling puts with the expectation that it will expire or that the underlying asset or security price would briefly fall, allowing the investor to buy the asset at a lower cost.

Selling cash-secured puts obligates an investor to buy a predetermined number of stocks or ETFs at a predetermined price (the strike price) by a predetermined date in the future (the expiration date). Investors will select an out-of-the-money put option or a strike price lower than the stock price at the time of purchase.

The best stocks for cash-secured puts are Heron Therapeutics (HRTX), Aemetis (AMTX), and Palantir (PLTR).

How to Use a Cash-Secured Strategy

If the investors are bullish on a stock, they should select an out-of-the-money put option with a strike price lower than the stock's current market value.

Investors get a reduced premium amount, and the put option is probably to be exercised when they choose a strike price that is extremely out of the money.

Investors who are bullish on a stock shortly ought to use different investing approaches. Cash secured-puts are the best choice if the investor has a slightly bullish stock assessment.

When the implied market volatility of a stock is high, it is advantageous to sell cash-secured puts since larger option premiums are the outcome. Searching for top-tier stocks that have recently experienced a fall is one technique to discover assets with high implied market volatility.

Although some prefer to sell weekly puts, most investors sell put options with 30-90 day time frames.

What are the Risks involved with Cash-secured Puts?

Cash-secured puts strategy has some shortcomings and risks.

  • If you're long-term bullish and considering selling equities for quick profits, selling cash-secured options might not be the best course of action. It's not the same as purchasing stocks at a discount.
  • Selling your put would be dangerous if the stock price declined after you did. The stock will still suffer a significant loss.

Bottom Line

Puts are occasionally regarded as a less effective tool than stocks because they are frequently seen as bearish instruments. Puts are used by bullish investors to both protect their gains during unsure market conditions and to make money. Writing cash-secured put options may be better than buying stocks if you're uncertain of the risks.

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