Options strategies
Cash-secured puts, explained
Selling a put with the cash set aside to buy the shares: how it pays, what happens if the stock falls, and how to read the yield and the odds honestly.
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What a cash-secured put is
A put option gives its buyer the right, but not the obligation, to sell 100 shares at a set price (the strike) until the expiration date. The seller of the put takes on the matching obligation: if the buyer exercises, the seller must buy the shares at the strike, whatever they’re trading for.
A cash-secured put is selling a put while keeping enough cash in the account to buy those shares: the strike × 100 for each contract. Your broker sets that cash aside. In return you receive the premium straight away.
People use it in two main ways: as a way to be paid while waiting to buy a stock at a lower price, or simply to earn the premium on cash they’re prepared to put into that stock. Either way, it only makes sense on a stock you’d be willing to own at the strike.
A worked example
Example
Selling a $95 put
Suppose a stock trades at $100. You sell one put with a $95 strike that expires in 30 days, and set aside $9,500 in cash.
With implied volatility (IV) of 30%, a 4% interest rate and no dividend, the Black-Scholes model values the put at about $1.33 a share, so you’d collect about $133 for one contract, before fees.
- Most you can make: the $133 premium, if the stock stays at or above $95.
- Breakeven: $95 − $1.33 = $93.67 at expiration.
- Most you can lose: about $9,367, if the stock went to zero and you had to buy it at $95.
Notice the shape: a small, capped gain and a large possible loss. That is true of every short put, however safe the strike looks.
What can happen by expiration
| Stock at expiration | What happens | Profit or loss |
|---|---|---|
| $100 | Put expires worthless | +$133 |
| $95 | Put expires worthless | +$133 |
| $93.67 | Assigned: buy at $95 | $0 |
| $90 | Assigned: buy at $95 | −$367 |
| $80 | Assigned: buy at $95 | −$1,367 |
If you’re assigned, the loss in the table is on paper at first: you now own 100 shares worth less than you paid. What you do next (hold them, sell them, or sell calls against them) is a new decision, and the shares can keep falling.
The risks
Risk
A short put loses almost like owning the stock
Below the breakeven, every dollar the stock falls costs you $100 per contract, just as if you owned the shares. A sudden drop (a bad earnings report, a market sell-off) can turn a month of small premiums into a large loss in a day.
- Your upside is capped at the premium. If the stock rallies, you keep $133 while a shareholder would have gained more.
- Your cash is tied up. The $9,500 can’t be used for anything else until the put expires or you close it.
- Closing early can cost more than you received. If the stock falls, buying the put back to exit the trade locks in a loss.
- Wide bid-ask spreads cost you. Options on less-traded stocks can have wide spreads: you sell near the bid and buy back near the ask, which can take a noticeable bite out of a small premium. Low open interest also makes it harder to exit at a fair price.
- “Cash-secured” limits leverage, not loss. Having the cash means you can always pay for the shares; it doesn’t make the shares hold their value.
Assignment and early assignment
Most US stock options are American-style: the buyer can exercise on any business day before expiration. For puts, early exercise is most likely when the put is deep in the money and has little time value left. You could be assigned before expiration without warning, and you’d find 100 shares in your account per contract.
At expiration, puts that finish in the money, even by a cent, are usually exercised automatically. If you don’t want the shares, the only way to be sure is to close the put before it expires.
Yield, annualized yield, and why they can mislead
Formula
Return on the cash set aside
Yield = premium ÷ (strike × 100)
Annualized yield = yield × 365 ÷ days to expiration
In the example: $133 ÷ $9,500 = 1.40% for 30 days, or about 17.1% annualized.
Annualized yield makes short and long expirations comparable, but it assumes you could repeat the same trade, with the same result, all year. It ignores the months when you’re assigned on a falling stock. Treat it as a way to compare trades, not as an expected return.
Choosing a strike
The model puts the chance of the $95 put finishing in the money at about 28%, and its probability of profit (POP) at about 78%: the chance the position makes at least $0.01 at expiration, which means the stock finishing above the $93.67 breakeven. Both come from today’s IV and change as the stock moves.
Example
A strike further away
With the same stock and inputs, a $90 put is worth about $0.40, or $40 per contract. Its POP is about 90%, but its most you can make is $40 against a possible loss of about $8,960. A higher POP almost always comes with a smaller payment for the same risk of a large loss.
Many people choose strikes by delta. The $95 put in the example has a delta of about −0.25. Others start from a price at which they’d genuinely be happy to own the stock, which keeps the trade grounded in the stock rather than in the premium. See Probability of profit (POP), explained for how to read these odds.