Cash-Secured Put
A cash-secured put is selling a put with cash set aside to buy the stock. Learn how you get paid to wait, what assignment means, and when this income trade fits.
A cash-secured put is when you sell a put option and set aside enough cash to buy the stock if you have to. You collect a premium up front. In exchange, you agree to buy 100 shares at a set price if the stock falls to it.
Think of it as getting paid to place a limit order. You already wanted to buy the stock cheaper, so you might as well earn income while you wait for your price. Let me show you with a deposit you have probably made before.
Getting Paid to Wait
There is a used car you like, listed at $10,000. You think that is a bit high. You would happily buy it at $9,000.
So you tell the dealer: "Here is $200, non-refundable. In return, if the price ever drops to $9,000 in the next month, I commit to buying it. If it does not, you keep my $200 and we walk away."
Two things can happen, and you are fine with both.
The price drops to $9,000. You buy the car, the thing you wanted, at the price you wanted. And you already pocketed effectively lowering your cost.
The price never drops. You do not buy the car, but you keep the $200 the dealer gave you for your commitment. You got paid to make an offer.
A cash-secured put is that exact deal. You get paid to commit to buying a stock at a price you already liked.
Watch a Cash-Secured Put Play Out
Apple is trading at $200, and you would love to own it at $190. So you sell one put:
- Strike: $190, the price you agree to buy at
- Premium collected: $4 a share, which is $4 times 100, or $400 in your pocket now
- Cash set aside: $19,000, ready to buy 100 shares at $190 if needed
That is why it is called cash-secured. You are not gambling with money you do not have. The cash to buy is parked and waiting. Now watch it unfold.
Apple stays at $200. It never reaches your $190 strike. The put expires worthless. You do not buy anything, and you keep the full $400. Next month you can sell another put and collect again.
Apple slips to $190. Right at your strike. The put expires worthless or close to it, and you likely keep your shares-free $400. A fine month.
Apple falls to $185. Now the put gets exercised. You buy 100 shares at $190, the price you agreed to. Yes, the market is at $185, so on paper you paid $5 above it. But remember the $400 premium: it lowers your real cost to $186 a share. You now own the stock you wanted, at a better price than today's $200, with income already banked.
What Could Go Wrong
The honest risk: if Apple truly crashes, you are still committed to buying at $190. If it drops to $150, you buy at $190 (real cost $186) while the market is at $150. You are down, just like any shareholder who bought early in a fall.
The premium cushions it a little, and you did want to own the stock. But only sell puts on companies you would be genuinely happy to own, at strikes you would genuinely be glad to pay. If you would not want the shares at that price, do not make the offer.
- You genuinely want to own the stock lower
- You have the cash set aside to buy
- You are neutral to mildly bullish
- You would not actually want the shares
- You do not have the cash to back it
- You expect a sharp crash
- A cash-secured put is selling a put with cash set aside to buy the stock if assigned.
- You keep the premium whether or not you end up buying.
- If assigned, your true cost basis is the strike minus the premium.
- Only sell puts on stocks you would be happy to own at that strike.
Pop Quiz
Three quick questions to see what stuck. Pick an answer and the explanation shows up right away.
What makes a put "cash-secured"?
The cash to buy 100 shares at the strike is parked and ready, so the obligation is fully backed. No borrowed money, no surprise.
You sell a $190 put and collect $4 a share. If assigned, what is your true cost basis?
Cost basis is the strike minus the premium: $190 minus $4 is $186. The premium lowers what you effectively paid.
The stock stays well above your strike and the put expires. What happened?
Above the strike, the put expires worthless. You keep the full premium, your cash frees up, and you can sell another put.
Bottom Line
A cash-secured put pays you to wait for your buy price. You sell a put on a stock you want to own, set the cash aside, and collect the premium. If the stock never falls to your strike, you keep the cash and repeat. If it does, you buy the shares you wanted at an effective discount.
It is the calm way to become a shareholder, and the mirror of the covered call. One gets paid to wait to buy. The other gets paid to hold and maybe sell.
Keep going: the covered call is the other half of this income pair. Or revisit the put option you are selling here.