What are the basics?
Cash-Secured Put is a trading strategy that involves selling (writing) a put option while simultaneously setting aside the cash to buy the stock if assigned.
Options, like stocks, are securities that can be bought and sold. An option, in essence, is a form of contract. The person who buys the contract pays the premium (or option premium) to enjoy the rights to the contract, while the person who sells the contract (the writer) receives the premium and is obligated to buy or sell the security.
The buyer of an option has the right to buy or sell a certain amount of an asset (the underlying asset), at an agreed-upon price (the strike price), within a specified period. When the buyer exercises this right, the seller is obligated to sell or buy the asset based on the contract terms.
A contract that grants the buyer the right to 「buy」 an asset is called a call option, while a contract that grants the buyer the right to 「sell」 an asset is called a put option.
When you use the cash-secured put strategy, you would be the seller of the put option. When you receive the option premium, you are obligated to buy the underlying asset (e.g., the stock) at the strike price within the specified period.
In addition, you can also buy back this contract from the market before the option is exercised (at any time) to release yourself from this obligation.
It should be noted that investors who adopt the cash-secured put strategy are often willing to exercise the option and buy the underlying stock. This allows them to buy the stock at the expected price and receive a premium for selling the put option at the same time.
For beginners, you could use this strategy when you are optimistic that the price of a stock may be bullish in the long run, and that you are willing to buy that stock. A naked option (whereby the seller has no assets in their accounts to cover the potential obligation), whether selling calls or selling puts, is not suitable for those new to options trading.
The following is an example to help you understand more about the cash-secured put strategy:
Suppose that in the US stock market, the current price of TUTU (a theoretical company) shares is $1,050, and you would like to buy TUTU shares at $1,000. You think that the price of TUTU shares will continue to moderately increase in the short-term, so you prepare $100,000 and sell one put option with a strike price of $1,000 at $50 and an expiration date of MM DD, 202X.
This means that, first of all, you would receive an amount of $50 x 100 = $5,000. At the same time, if you are obligated to buy 100 TUTU shares at $1,000/share before MM DD, 202X, you can use the $100,000 that you have prepared previously to buy the 100 TUTU shares.
Of course, if you change your mind before expiration (for example, you don't want to buy the stock), you can also buy back the option to close your position, without being assigned.
This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. Read more
