Cash-Secured Put – How to Profit from this Option Strategy

Cole Turner

Exercise an option

A cash-secured put is an options trading strategy that involves selling a put option while simultaneously setting aside enough cash to buy the underlying stock.

This is an effective strategy when an investor is bullish on a stock but wants to buy the stock at a discounted rate. This article will explain how to effectively use the cash-secured put to an investor’s advantage.

Let’s look at an example of this strategy in action.

Assume stock ABC is trading at $60. An investor is interested in the stock but does not want to pay $60. He decides to execute a cash-secured put strategy. The investor sells one put option that expires in a month with a strike price of $57. He collects a premium of $2 per share for selling the put option. At the same time, he sets aside $5,700 in cash, in the event that he is obligated to buy the shares at the strike price.

Ideally, the stock price falls below $57 at expiration. If this happens, the put option would be exercised and the seller would be obligated to buy the shares of stock at $57. This is not a bad thing as the seller wants to own the shares of stock. By using this strategy, he gets the shares of stock at $57 rather than $60. Plus, he gets the premium of $2 per share.

In another scenario, if the stock never falls below $57 at expiration, then the put option would expire worthless. This is not bad for the seller either as he walks away with the premium of $2 per share.

Exclusive  Tom Sosnoff – An Icon and Visionary in the World of Options

In either scenario, the option seller pockets the premium and will get the stock that he wants at a discounted rate.

A cash-secured put is a great strategy for a bullish investor to buy a stock at a discounted rate. However, if an investor wants to capitalize on immediate gains in the stock, then this strategy is not the route to take. The investor is counting on a short-term dip in the stock price (just to become the owner of the stock), followed by a long-term rise in the stock price once he is the owner.

That is a specific scenario that must happen in order for the cash-secured put to be most effective. The odds of this scenario not happening are relatively high and that’s what makes this strategy risky.

But if an investor does believe that a stock will have a slight dip in price followed by a long-term rise in price, then this is a great strategy to get that stock at a discounted rate.

After reading this article, investors should feel prepared to use this effective options trading strategy.

Like This Article?
Now Get Mark's FREE Special Report:
3 Dividend Plays with Sky-High Returns

This newly-released report by a top-20 living economist details three investments that are your best bets for income and appreciation for the rest of the year and beyond.

Get Access to the Report, 100% FREE


img
previous article

The bull call spread and the bull put spread are option strategies used when an investor expects the price of the underlying security to increase. These strategies can be helpful and profitable when used correctly. This article will explain everything there is to know about the bull call spread and bull put spread strategies. If investors need a reminder of what call and put options are, then click on this

PREMIUM SERVICES FOR INVESTORS

Dr. Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen is a professional economist, investment expert, university professor, and author of more than 25 books.

Product Details

LEARN MORE HERE

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

Product Details

LEARN MORE HERE

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker,
financial journalist, and money manager. As well as a book author and regular contributor to
numerous investment websites, Jim is the editor of:

Product Details

LEARN MORE HERE

Bob Carlson

Bob Carlson provides independent, objective research covering all the financial issues of retirement and retirement planning. In addition, Bob serves as Chairman of the Board of Trustees of the Fairfax County (VA) Employees’ Retirement System, which has over $2.8 billion in assets.

Product Details

LEARN MORE HERE

Mike Turner

Mike Turner’s financial, mathematical, computer science and engineering background serves as the foundation for his disciplined, rules-based approach to trading. Mike’s three services include:

Product Details

LEARN MORE HERE

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street. Since 2010, Hilary's financial publications have provided stock analysis and investment advice to her subscribers:

Product Details

LEARN MORE HERE

DividendInvestor.com

Used by financial advisors and individual investors all over the world, DividendInvestor.com is the premier provider and one-stop shop for dividend information and research.

Product Details

Popular tools include our proprietary Dividend Calendar, Dividend Calculator, Dividend Score Card, and many more.

LEARN MORE HERE