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Cash Secured Put - Introduction
Cash Secured Put simply means selling or "writing" put options with full cash ready in the account in the case of an assignment. Executing a Cash Secured Put allows you to play bookmaker, selling put options to options traders speculating on the price of the underlying stock dropping. As such, as long as the underlying stock rises or even closes above the strike price of the put options by expiration, you get to keep the premium you sold the put options for as profit.
This free options strategy tutorial shall explore the Cash Secured Put in depth, explain how to use it, its calculations and more.
Cash Secured Put - Classification
Strategy : Bullish
Outlook : Moderately Bullish
Spread : N/A
Debit or Credit : Credit
What Is Cash Secured Put
A Cash Secured Put is an options strategy where you write put options in speculation that the underlying stock will close at a price at or higher than the strike price of the put options sold. When you sell a Cash Secured Put at a strike price of say $50 for $1.00 premium, you make that $1.00 premium in profit by expiration if the underlying stock closes at or higher than $50 upon expiration of these put options. As such, you can potentially profit in more than one possible direction, thereby increasing your chances of winning. However, the problem with a Cash Secured Put is that it will go into an unlimited loss for as long as the price of the underlying stock goes downwards below the strike price of the put options sold. Which is why it is a bullish options strategy with unlimited risk but limited profit potential.
The Cash Secured Put is essentially a Naked Put Write that is fully backed by cash. In a regular Naked Put Write, the options writer requires only enough cash in the account to satisfy the "Margin" requirement of writing those options, without the need for having the full cash amount that is needed to take physical delivery on the underlying stock. This "Margin" is much lesser than the full cash amount needed to take delivery of the underlying stock in case those options are exercised. This is actually risky for the options brokers who may then have to take delivery on the underlying stock on behalf of the options trader in case of an assignment. As such, in order to alleviate the risk undertaken by the options brokers for allowing put options writing, the Cash Secured Put was invented, basically requiring the options trader to have the full cash amount required to take delivery of the underlying stock at the strike price of the put options written. For most beginner options traders with low Trading Level, Cash Secured Puts is the only options writing strategy they can pursue.
When To Use Cash Secured Put?
The Cash Secured Put could be used when one expects the price of the underlying stock to remain stagnant or rise.
How To Use Cash Secured Put?
Cash Secured Put consists of writing At The Money or Out of The Money Put Options.
Sell ATM or OTM Put
Cash Secured Put Example
You are moderately bullish on QQQ and would like to profit as long as the price of QQQ remains above $63. Assuming QQQ is trading at $63 and its $63 strike price put options are bidding at $1.00.
You decide to SELL TO OPEN 1 contract of the $63 strike price put options for a total premium of $1.00 x 100 = $100
In order to write this single contract of $63 strike price put options, you need to have at least $63 x 100 = $6300 in your options account as cash security in case of
As long as the price of QQQ remain above $63 by expiration, you get to keep the whole $100 premium as profit.
Choosing Strike Price and Expiration Month for Cash Secured Put
The choice of expiration month depends on how long you think the price of the underlying stock will hold above the intended strike price. The longer you think the price of the underlying stock will hold above the intended strike price, the more premium you will receive by expiration and the greater your profit.
The choice of strike price for the Cash Secured Put is basically the strike price you expect the underlying stock to close at or above by expiration. In the example above, you were expecting the price of QQQ to end up at or above $63 by expiration which was why the $63 strike price put options were chosen. One important thing to take note of here is that if the price of QQQ end up lower than $63 as expiration draws nearer, the position may get assigned before expiration. Also, since you recieve cash for writing the put options, those cash are used for offsetting losses when the price of QQQ drops below $63. As such, even if the price of QQQ drops below $63, you only really start making a loss when the drop exceeds the premium received so there is really a buffer zone. As such, if you do not intend to take delivery of the underlying stock at all, you might want to place a stop loss at or slightly below $63 using a contingent order.
Rough Guide For A Standard Cash Secured Put
1. At least 3 months to expiration
(giving position enough time to move.)
2. Write put option at a strike price you think the stock will end up higher than.
Trading Level Required For Cash Secured Put
A Level 2 options trading account that allows the buying of call and put options is all that is needed for the Cash Secured Put. Read more about Options Account Trading Levels.
Profit Potential of Cash Secured Put
Cash Secured Put achieve its maximum profit potential when the underlying stock closes above the strike price of the put options by expiration. Potential loss is unlimited and will continue to accumulate for as long as the price of the underlying stock drops below the strike price of the put options.
Profit Calculation of Cash Secured Put
Maximum Profit = Net Premium Received
Profit % = Premium received / Cash Security
Maximum Loss = Unlimited
Cash Secured Put Profit Calculation
From the above Cash Secured Put example :
Cash Security = $6300
Options Premium Received = $100
Since $6300 is locked up in order to earn that $100 profit, Profit % = $100 / $6300 = 0.0159 = 1.59%
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Risk / Reward of Cash Secured Put
Upside Maximum Profit: Limited
Maximum Loss: Limited
Break Even Points of Cash Secured Put:
A Cash Secured Put is profitable as long as the price of the underlying stock remains above the strike price of the put options or by an amount below the strike price not exceeding the premium received.
Breakeven Point = Strike - Premium
Cash Secured Put Breakeven
From the above Cash Secured Put example :
Breakeven Point = $63 - $1 = $62
The position will remain profitable as long as the price of QQQ remain above $62 and start to make a loss when the price of QQQ drops below $62.
Cash Secured Put Greeks
Since you are selling put options which have negative delta, you end up with a positive delta position that profits when the price of the underlying stock goes upwards.
Being Gamma Negative means that the delta of the position becomes lower the more the price of the underlying stock goes upwards until such a point it becomes zero delta, reaching its maximum possible profit.
Increases in implied volatility increases the price of the put options sold which becomes your loss. In a Cash Secured Put, you want the value of the put options that you sold to go down to zero as quickly as possible.
Cash Secured Puts are affected by Time Decay in a good way. Positive theta means that the position will decay in value over time as expiration approaches, helping you pocket the premium value of the put options sold as profit.
Advantages Of Cash Secured Put
:: Can be executed at very low trading levels
:: Able to profit from sideways and upwards move
Disadvantages Of Cash Secured Put:
:: Requires signicant cash security
:: Relatively low Return on Investment due to high cash security needed
Adjustments for Cash Secured Puts Before Expiration :
1. If the price of the underlying stock is rallying and turning from a moderate bullish outlook to a sustained bullish outlook, you could transform the Cash Secured Put position into a hedged bullish Risk Reversal position by buying at the money call options with the short put options acting as partial hedge.
2. If the price of the underlying stock is moving largely sideways and turning from a moderate bullish outlook into a neutral outlook, you could transform the Cash Secured Put position into a neutral options strategy such as the short strangle or short straddle position to increase neutral profitability by writing an equal number of out of the money or at the money call options.
3. If the price of the underlying stock turned downwards instead, the best thing to do is to close the position before losses accumulate rather than to try to repair the position.