Cash-Secured Puts: The Complete Guide
Cash-Secured Puts
Key Takeaways
- A cash-secured put means selling a put while holding enough cash to buy 100 shares if assigned.
- You get paid to place a limit buy order, collecting premium while waiting for your target price.
- If the stock stays above your strike, you keep the premium and your cash. Repeat.
TL;DR
Cash-secured puts let you get paid to wait for a stock to drop to your buy price. You sell a put at a strike where you'd happily own the stock, hold enough cash to cover assignment, and collect premium. If assigned, your real cost basis is the strike minus premium collected.
What Is a Cash-Secured Put?
A cash-secured put (CSP) has two parts:
- Sell a put option at a strike price where you'd happily buy the stock
- Hold enough cash in your account to buy 100 shares if assigned
The "cash-secured" part means you have full collateral. If the stock drops below your strike and you're assigned, you have the money to buy the shares. No margin, no margin calls.
Think of it as a limit buy order that pays you. You're telling the market: "I'll buy this stock at $X price, and you're going to pay me to wait."
How CSPs Generate Income
When you sell a put, premium is deposited into your account immediately. Three outcomes:
Stock stays above strike → Put expires worthless. You keep the premium and your cash. Sell another put next month.
Stock drops below strike → You're assigned 100 shares at the strike price. Your real cost basis is strike minus premium (a built-in discount).
Stock drops near strike → You can buy the put back early for a profit (if it's worth less than you sold it for) or let it ride.
CSP Trade Example
You want to buy AAPL, currently at $175, but you'd prefer to own it at $165.
You sell a $165 put expiring in 35 days and collect $3.00/share ($300).
You hold $16,500 in cash as collateral.
If AAPL stays above $165: You keep $300. Return on capital: $300 / $16,500 = 1.8% in 35 days (19% annualized). Sell another put.
If AAPL drops to $160: You're assigned 100 shares at $165. Real cost basis: $165 - $3 = $162/share. You now own AAPL at an 8% discount from where it was when you entered. Start selling covered calls.
CSPs vs. Limit Buy Orders
A CSP is strictly better than a limit buy order:
| Feature | Limit Buy | Cash-Secured Put |
|---|---|---|
| You choose your entry price | Yes | Yes |
| You get paid while waiting | No | Yes (premium) |
| Your effective cost is lower | No | Yes (strike - premium) |
| Time limit | None | Expiration date |
The only advantage of a limit order is that it doesn't expire. But you can simply sell a new put each month if the old one expires worthless, collecting premium every cycle.
The Risk
CSPs are not free money. The risk is the same as buying stock: if the stock plummets, you own shares at your strike price and the stock may keep falling.
If you sell a $50 put and the stock drops to $30, you own shares at an effective cost of $47-48 (after premium) but they're worth $30. That's a real loss.
The mitigation: only sell puts on stocks you've researched and genuinely want to own. If you wouldn't buy 100 shares at the strike price without the premium, don't sell the put.
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