Cash-Secured Put

A cash secured put is a short put backed by enough cash to buy the shares if you are assigned. You sell a put at a strike where you would be happy to own the stock, collect the premium and wait. If the stock stays above the strike, you keep the premium. If it falls below, you buy the shares at the strike, effectively at a discount equal to the premium. It is a conservative way to sell puts and a popular alternative to placing a limit order to buy.

How it works#

1. Choose a stock you want to own and a price you would pay.
2. Sell a put at that strike, usually 30 to 45 days out.
3. Set aside cash equal to strike × 100 per contract.
4. At expiry: above the strike, the put expires and you keep the premium. Below the strike, you are assigned and buy 100 shares per contract at the strike.

Payoff at a glance#

The payoff is identical to a Short Put. The difference is that the cash is fully in place, so no margin or leverage is involved.

Worked example#

Cash secured put vs limit order#

See Limit Orders.

The wheel strategy#

The wheel combines cash secured puts and covered calls in a cycle:

1. Sell cash secured puts until assigned.
2. Once you own the shares, sell covered calls until they are called away. See Covered Call.
3. Return to step 1.

The wheel collects premium at each stage. Its weakness is a stock that falls sharply after assignment: you are left holding shares well below your cost, selling small calls while waiting for recovery.

Choosing a strike#

• Pick a price you genuinely want to pay, based on valuation or support levels. See Support and Resistance.
• Lower strikes give more safety and less premium.
• Higher strikes give more premium and more chance of assignment.
• Delta of about 0.20 to 0.30 is a common range for sellers. See Delta.

Risks#

• The stock can fall far below the strike. You still buy at the strike.
• Opportunity cost if the stock rallies.
• Cash is tied up while the put is open, though it may earn interest at many brokers.
• Event risk: earnings and news can cause gaps below the strike. See Price Gaps and How to Trade Them.

Common mistakes#

• Selling puts on stocks only because premiums are high.
• Selling more contracts than your cash can cover.
• Ignoring earnings dates.
• Treating it as income without accepting stock risk.

Frequently asked questions#

What is a cash secured put?#

Selling a put option while holding enough cash to buy the shares at the strike price if assigned.

Is a cash secured put safer than a naked put?#

It uses no leverage, so it avoids margin calls, but the market risk per contract is the same. Its safety comes from limiting size to the cash you hold.

What is the wheel strategy?#

A cycle of selling cash secured puts until assigned, then selling covered calls on the shares until they are called away, then repeating.

Next, learn to insure a stock position with the Protective Put.