CASH-SECURED PUT
Overview
Sell a put while holding enough cash to buy the shares if assigned. You collect the premium immediately and either keep it as profit (stock stays above strike) or acquire the shares at an effective lower price (strike minus premium). A systematic strategy for buying stocks at a discount.
What it does
You're being paid to agree to buy a stock you already want at a price you're comfortable with. The premium you collect lowers your effective purchase price. If the stock stays above the strike, you keep the premium as income. If it falls through the strike, you end up owning shares at an effective discount. This is the starting point of the 'Wheel Strategy.'
Structure
sell 1 put
Setup
- 1.Identify a stock you want to own at a lower price.
- 2.Set aside cash equal to Strike Price × 100 in your account.
- 3.Sell 1 Put option at a strike at or below your target entry price.
- 4.Choose an expiration 20–45 days out with good premium.
- 5.If assigned, you purchase shares at the strike — your effective cost basis is strike minus premium.
Max profit
Premium received. E.g., $420 from selling a $315 put for $4.20.
Max loss
Substantial. If stock falls to zero: (Strike − Premium) × 100. E.g., $310.80 × 100 = $31,080.
Breakeven
Strike − Premium Received. E.g., $315 − $4.20 = $310.80.
When to use
When you want to buy a stock at a lower price and get paid to wait. Works best when implied volatility is above its historical average.
When to avoid
If you're bearish on the company, don't actually want to own shares, or a binary event could cause a large gap down.
Example trade
Stock: MSFT trading at $325 Sell 1 MSFT $310 Put at $4.20 (credit $420) Cash set aside: $31,000 (310 × 100) Expiration: 45 days Breakeven: $310 - $4.20 = $305.80 Max Profit: $420 If MSFT stays above $310: Put expires worthless, keep $420 If MSFT drops to $295: Assigned at $310, buy 100 shares; effective cost = $305.80
Common mistakes
- ×Selling puts on stocks you wouldn't actually want to own — assignment can leave you stuck with a bad position.
- ×Not having the full cash reserved — if assigned, you may not have funds to purchase the shares.
- ×Ignoring earnings dates that can cause large overnight gaps below your strike.
- ×Adding more short puts into a sharp decline, compounding downside exposure.
- ×Selling puts in low-IV environments where premium doesn't compensate for the risk.
FAQ
Is a cash-secured put safer than buying stock outright?
The downside risk is similar (both involve owning shares or having them assigned), but the premium lowers your effective cost basis, providing a modest buffer.
What happens after assignment?
You own 100 shares at the strike price. Many traders then sell covered calls against those shares (the Wheel Strategy) to continue generating income.
Should I roll the put if the stock approaches the strike?
Rolling (buying back the current put and selling a further-out or lower-strike put) is common. It extends time or moves the strike lower, but doesn't eliminate risk.