Do you know how you could potentially earn a little cash just for agreeing to buy a stock you already wanted to own? In the world of options trading, this is possible with a strategy known as the cash-secured put.
What is a put option?
A put option is a contract between 2 parties, an option buyer and an option seller. This put option contract controls a specified number of shares that can be exercised at a specified price (the strike price) before a specified date (the expiration date). From the option buyer’s perspective, they can exercise the option to sell shares of a stock or ETF at the strike price or trade away the contract. Something you’ll often hear in options trading is that buyers are “long the option."
From the seller’s perspective, if the put option is exercised, the seller is required to buy the underlying investment from the options buyer at the strike price, regardless of the current market price. In a cash‑secured put, the seller sets aside enough cash to fully purchase the shares if assigned. While buyers are said to be “long,” those who sell the option are referred to as being “short.”
What is a cash-secured put?
A cash‑secured put is easiest to understand from the put seller’s point of view. When you sell a cash‑secured put, you collect the premium upfront, and in exchange you take on the potential obligation to buy the stock at the strike price.
Since you could be assigned (meaning you must actually buy the shares) if the stock price falls below the strike price, your broker requires you to reserve enough cash to fully cover the potential purchase, hence the term “cash‑secured.”
Many traders use cash‑secured puts when they’d be comfortable owning the stock at a lower price. If assigned, they end up buying the shares at the strike price, effectively reduced by the premium they collected. If not assigned, they simply keep the premium.
How does a cash-secured put work?
Stock price is above the strike price at expiration:
If the stock price stays above the strike price until expiration and the put is not exercised, then it will expire worthless. This means the option seller keeps the premium initially received and does not have to buy the underlying asset.
Stock price is below the strike price at expiration:
If the underlying stock price falls below the strike price, the put option may be exercised. This would require the put seller to use the cash they initially set aside to buy the shares at the strike price. This can be true whether the market price is just barely below the strike price or significantly below it.
An example of a cash-secured put
Stock is trading at $55
Let’s say you’re interested in buying shares of Company XYZ, currently trading at $55. You believe in the company’s long-term potential but would prefer to pay less per share, and you don’t expect the stock to drop significantly. In this case, selling a cash-secured put might help.
You sell a put option contract
Imagine you sell a put option with a $50 strike price that expires in one month. You collect $230 upfront (that’s $2.30 per share). By selling the put, you’re agreeing that you may have to buy 100 shares at $50 if the stock is below that price at expiration, so you set aside $5,000 to prepare.
If the stock does fall below $50, you’ll likely need to buy the shares at that price. If this happens, the breakeven point is $47.70 per share ($50 purchase price−$2.30 per share premium received). In other words, you would profit if the stock is above $47.70 and lose if it’s below
The risk is that the stock could drop sharply. For example, if it falls to $35, you still must buy at $50. In the worst case, if the stock falls to $0, you’d lose $4,770 ($5,000 total purchase−the $230 premium received). If the stock stays above $50, the option expires worthless, and you simply keep the full $230 without buying any shares.
Advantages of cash-secured puts
Cash-secured puts come with a couple of main benefits:
- You receive income regardless of whether the option is exercised. One of the benefits of a cash-secured put is that, as the options seller, you receive a premium payment regardless of whether the underlying asset’s price rises, falls, or stays the same.
- You may be able to buy a stock below the current price. If the put option is exercised, you will end up buying the stock at the strike price, which may be lower than the market price at the time you entered the contract. This can make cash‑secured puts an appealing way for some investors to acquire a stock they already want to own, especially if they believe its value will rise over the long term.
Cash‑secured puts can seem similar to limit orders, which only execute if the stock reaches a certain price. But unlike limit orders, cash‑secured puts can pay you income even if you don’t end up buying the stock. And if you do buy it, your total cost may be lower than it would have been otherwise.
Disadvantages of cash-secured puts
Before considering a cash-secured put, it’s important to understand the potential risks, including:
- You may lose money. Cash‑secured puts carry similar loss risks to owning the stock. A stock you buy can lose value—and even fall to $0. In that worst‑case scenario, you’d lose nearly the same amount selling a cash‑secured put that gets exercised, except for the premium you earned upfront.
- Your potential profit may be limited. Because the underlying investment has to drop below the strike price for the seller of a cash-secured put to buy the investment, cash-secured puts have an inherent feature of limited profit. If the stock price rises, you’ll only get to profit from the premium you received, and you may experience the opportunity cost of missing the chance to buy the stock.
How to sell cash-secured puts
If you’d like to sell cash-secured puts, here are some steps that you could follow.
- Open and fund a brokerage account. If you don’t already have a brokerage account, consider looking for one with low fees and research capabilities that you find easy to use. Once you’ve opened an account, transfer money into it, so you’ll have funds to cover any cash-secured put contracts you want to trade.
- Apply to trade options. Depending on the financial institution, you’ll likely need to apply to trade options. At Fidelity, this involves completing a simple application about your finances and investing experience.
- Research investment options and start selling cash-secured puts. If you don’t already know which stocks or ETFs you might want to sell cash-secured puts for, you can use your brokerage’s resources to identify potential candidates. Then log into your brokerage account, access the option chain, and enter the ticker symbol. The option chain lets you filter to potentially view several strikes, expirations, quotes of the options, and option strategy views. It will provide the ability to trade right from the option chain. If you trade at Fidelity, we have an Option Strategy Builder to help you build and place an options trade.