Cash-Secured Put Explained
A cash-secured put sells a put and sets aside the cash to buy the stock at the strike, paying you premium to wait for a lower entry.
What it is
A cash-secured put is a short put backed by enough cash to buy 100 shares at the strike if you are assigned. You sell an out-of-the-money put, collect the premium, and take on the obligation to buy the stock at the strike if it falls there by expiration. If the stock stays above the strike, you keep the premium as pure income. If it drops below, you buy the shares you wanted anyway, at an effective price reduced by the premium. It is the mirror image of a covered call and the first leg of the wheel strategy, a way to get paid to set a limit order below the market.
Payoff at expiration
When to use it
Use a cash-secured put on a stock you would be happy to own at a lower price, when implied volatility is elevated so the premium compensates you well for the obligation. It suits a neutral-to-bullish view: you win if the stock holds or rises, and if it dips you acquire it at a discount to today. Desks and disciplined investors use it to enter positions at a target price while earning yield in the meantime. Avoid it on a name you are unwilling to own outright, and be aware that a sharp gap below the strike still hands you the stock at the strike, well above where it now trades.
Greeks profile
| Delta | Positive. A short put gains as the underlying rises, so you are structurally long the stock in exposure terms. |
| Gamma | Short gamma. Your delta lengthens as the stock falls toward and through the strike, which is the assignment risk building. |
| Theta | Positive. The put decays in your favour every day the stock stays above the strike. |
| Vega | Negative. Falling implied volatility helps; a volatility spike raises the cost to buy the put back. |
Max profit, max loss & break-evens
Max profit = premium collected, kept in full if the stock finishes at or above the strike. Max loss = strike − premium (realised only if the stock goes to zero after assignment). Break-even = strike − premium collected (your effective purchase price if assigned).
Concrete example
A stock trades at 100 and you sell the one-month 95 put for 2, setting aside 9,500 dollars to buy the shares if needed. If the stock stays above 95 you keep the 200 dollars, a clean 2 percent in a month on the cash at risk. If it falls to 92 you are assigned and buy at 95, but your effective cost is 93 after the premium, below where the stock now trades. Your break-even is 93.
Risks & management
The risk is identical to owning the stock below your break-even: if the name collapses after assignment, you carry the loss down to zero, offset only by the premium. The premium is small compensation for a large tail, so size the position as though you already own the shares, because you may. Manage by selling puts only at strikes you would genuinely buy, rolling down and out if the stock falls and you want to delay assignment, and avoiding names with binary catalysts unless you want that exposure. After assignment, the position naturally rolls into a covered call: the wheel.
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