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.
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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.
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.
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 an assignment.
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.
Cash Secured Put Profit Calculation
From the above Cash Secured Put example :
Cash Security = $6300
Options Premium Received = $100
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.
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.
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