Cash Secured Put
What is a Cash-Secured Put?
A cash-secured put is an opening write transaction that creates a short put option position. By ‘writing’ the option, you are selling the option to another party. As the writer of the option you must hold enough cash in your account equal to the exercise cost in order to satisfy the obligation if the options were assigned. You won’t be able to withdraw that cash or purchase other securities with it as long as the short put option position remains open. To write cash-secured puts you need covered options approval in your account.
Cash Secured Put Strategy
The backbone of my trading strategy is the writing of cash-secured puts. My primary goal is to collect the premium from the sale of the option. I only sell puts on stocks where I have a bullish outlook and I focus on stocks that I don’t mind owning because there is always the risk that the option will be assigned and I will be put the stock. Some of my screens focus on higher-quality dividend-paying stocks, but I don’t limit my trading to these stocks. I simply wait for a temporary pullback in the price of a stock I am watching and sell puts.
I like selling puts because if the option is assigned I will acquire the underlying stock below the current market price. The effective purchase price I pay is the strike price of the put option less the premium I received from the sale. I will often repeat the cash-secured put strategy many times before acquiring a stock. Whether or not the put is assigned I feel it is an acceptable outcome. The premiums I collect will provide income and lower my cost basis.
Risks with Cash-Secured Puts
A strategy involving selling puts has considerable risks you must consider. First off, the stock might not only drop, but sink well below the strike price. You must be comfortable with the strike price as a longer-term acquisition price and you should always have an exit strategy in place.
Another risk involved in selling puts is that the investor may miss out on a stock that keeps rising. By waiting for a price dip that might not ever materialize you could miss out on a winner. I never look at it as one that ‘got away.’ I figure I still made money on the trade because I collected the premium. I will take a profit any time I can get it. I don’t get upset that I missed out on an opportunity because the market will always provide more opportunities.