Cash Secured Puts: Get Paid to Buy Stocks You Want at a Discount

What is a Cash Secured Put?

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Think of it as getting paid to place a limit buy order. You’re telling the market: “I’ll buy this stock at $X price, and you’ll pay me for making that commitment.”

The Mechanics

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Components of a Cash Secured Put

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1. Cash Reserve: You hold enough cash to buy 100 shares at the strike price
2. Short Put Option: You sell 1 put option contract (covers 100 shares)
3. Strike Price: The price at which you agree to buy the shares
4. Premium: The income you receive for selling the put option
5. Expiration Date: When the option contract expires

Visual Representation

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graph TD
    A[You Have $5,000 Cash
Want to Buy Stock at $50] --> B{Sell 1 Put Option}
    B --> C[Strike Price: $50
Premium Received: $1.50/share
Expiration: 30 days]
    C --> D{At Expiration}
    D -->|Stock > $50| E[Keep Cash
Keep Premium
Total Profit: $150]
    D -->|Stock < $50| F[Buy 100 Shares at $50
Effective Cost: $48.50/share
You own stock you wanted!]

Practical Example

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Let’s walk through a real-world scenario:

Setup

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• Stock: Apple (AAPL)
• Current Price: $180 per share
• Your Target Buy Price: $170
• Cash Reserved: $17,000 (enough to buy 100 shares at $170)

The Trade

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You sell 1 put option:

• Strike Price: $170
• Premium: $2.50 per share
• Expiration: 30 days
• Premium Received: $250 (100 shares × $2.50)

Possible Outcomes

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Day 0:  Stock at $180, Sell put for $2.50/share
Day 30: Stock at $175 (above strike)

Result:
- Keep your $17,000 cash
- Keep the $250 premium
- Annualized return on cash: ~17.6% ($250/$17,000 × 12 months)
- Can sell another put option next month

Day 0:  Stock at $180, Sell put for $2.50/share
Day 30: Stock at $160 (below strike)

Result:
- You buy 100 shares at $170 (the strike price)
- Premium kept: $250
- Effective cost per share: $167.50 ($170 - $2.50 premium)
- Current value: $16,000 (100 × $160)
- Paper loss: $750 (but you own stock you wanted!)

Cash Secured Put Payoff Diagram

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Visual P&L Diagram

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When to Use Cash Secured Puts

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How to Choose the Strike Price

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Using Delta as a Guide

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Delta measures the probability of an option being in-the-money at expiration. For put selling:

Strike Price Selection Strategy

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graph LR
    A[Current Stock Price] --> B{Your Goal?}
    B -->|Maximum Premium| C[At-the-Money Strike
Higher risk of assignment]
    B -->|Balanced| D[5-10% Below Current
Delta around -0.25]
    B -->|Conservative| E[15-20% Below Current
Delta around -0.15]

    classDef aggressive fill:#ef4444,stroke:#dc2626,color:#fff
    classDef balanced fill:#f59e0b,stroke:#d97706,color:#fff
    classDef conservative fill:#22c55e,stroke:#16a34a,color:#fff

    class C aggressive
    class D balanced
    class E conservative

Risk/Reward Profile

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Maximum Gain

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Max Profit = Premium Received

Example: $250 (the premium you collected)

Your profit is capped at the premium - you can’t make more even if the stock moons.

Maximum Loss

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Max Loss = (Strike Price × 100) - Premium Received

Example: ($170 × 100) - $250 = $16,750

This is the same risk as owning the stock minus the premium. Only sell puts on stocks you actually want to own!

Breakeven Point

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Breakeven = Strike Price - Premium per Share

Example: $170 - $2.50 = $167.50

Visual Comparison: Cash Secured Put vs Buying Stock

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graph LR
    A[Want to Own Stock] --> B[Buy Stock Now]
    A --> C[Sell Cash Secured Put]

    B --> D[Pay Full Price
Immediate Ownership
No Premium Income]

    C --> E[Get Paid to Wait
Buy at Discount if Assigned
May Not Get Shares]

    classDef immediate fill:#3b82f6,stroke:#2563eb,color:#fff
    classDef strategic fill:#f59e0b,stroke:#d97706,color:#fff

    class B immediate
    class C strategic

Advanced Considerations

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Rolling the Put

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If the stock is approaching your strike and you don’t want to be assigned yet, you can “roll” the put:

Step 1: Buy back the current put (close position)
Step 2: Sell a new put with later expiration or lower strike

Example:

• Current: $170 strike expiring in 5 days, stock at $172
• Action: Buy back for $1.50, sell $165 strike 30 days out for $3
• Net credit: $1.50 per share ($150 total)

The Wheel Strategy

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Cash secured puts are often the entry point for the popular “Wheel Strategy”:

graph TD
    A[Sell Cash Secured Put] -->|Not Assigned| A
    A -->|Assigned - You Own Shares| B[Sell Covered Call]
    B -->|Not Called Away| B
    B -->|Called Away - Shares Sold| A

Real-World Performance

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Monthly Income Example

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Cash Reserve: $50,000 across 5 stocks ($10,000 each)

Assumptions: All puts expired worthless (stocks stayed above strikes)

Key Takeaways

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1. Income While Waiting: Get paid to wait for stocks to reach your target buy price
2. Limited Profit: Your max gain is the premium received
3. Significant Risk: You could be forced to buy shares at the strike price even if the stock drops much lower
4. Best for Stocks You Want: Only sell puts on companies you’d happily own
5. Works with Covered Calls: Part of the popular “Wheel Strategy” for recurring income

Common Mistakes to Avoid

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Conclusion

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Cash secured puts are a smart way to generate income while waiting to buy stocks you already want to own. They work best when you:

• Have a list of quality stocks you’d love to own at lower prices
• Want to generate income from idle cash in your brokerage account
• Accept that you might be assigned and will own the shares
• Understand that your profit is limited to the premium received

Remember: Only sell puts on stocks you actually want to buy. If you get assigned, you should be excited to own the shares, not disappointed!

Disclaimer: This is educational content only. Options trading involves risk and is not suitable for all investors. Do your research!