LEARN / THE FOUNDATION
Cash-secured puts,
explained.
The cash is reserved. The risk still needs to be understood.
What is a cash-secured put?
You sell a put and reserve enough cash to buy the underlying shares if assigned. You receive an option premium in exchange for that obligation.
Premium, breakeven, and risk
For the short put at expiration, profit is capped at the premium collected. Breakeven is the strike minus the premium per share, before fees. If the stock falls sharply, losses can substantially exceed that premium. Reserving cash makes the purchase fundable; it does not insure the stock’s value.
What does assignment mean?
Assignment obligates the put seller to purchase the shares at the strike. You may pay more than their current market value. American-style equity options can be exercised before expiration.
Questions to bring to the research
- Would I be comfortable owning this underlying at the strike?
- How much portfolio cash would this commitment use?
- Have I checked the contract, current broker quote, and company events?
- Could I tolerate the downside if the shares decline substantially?
Source: Options Industry Council: Cash-Secured Put. See also FINRA: Options.
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