Strategy guide
Cash-Secured Puts Explained
A cash-secured put is a strategy where you agree to buy a stock at a set strike and keep enough cash set aside to do so if assigned. It is commonly used to generate premium while targeting a lower entry price.
What is a cash-secured put?
You sell a put option and set aside cash equal to the strike price multiplied by the contract size. If the stock stays above the strike, the option expires worthless and you keep the premium.
This strategy is often used by investors who are willing to buy a stock at a lower price and are comfortable with the obligation if assigned.
Why traders use it
- Generate premium income
- Potentially enter a stock at a lower effective basis
- Build a plan around a specific target entry price
Key risks and trade-offs
The main risk is a sharp drop in the stock, which can leave you buying at a strike that is far above the market price. You must be prepared for assignment and maintain sufficient available cash.
Because of this, the strategy works best when you are comfortable owning the stock at the chosen strike and want to monetize that intention.
How to evaluate the trade
Use OTL2 to model the position, determine the break-even level, and visualize the payoff. Reviewing expiration scenarios helps you understand where the strategy adds value and where the risk starts to rise.