Cash Secured Put

What it is and when to use it

Selling a put obliges you to buy 100 shares at the strike if the holder exercises. "Cash-secured" means you have that money set aside — $55,500 in the example — and are not using margin to back it. That distinction is not bookkeeping: it is what separates a conservative strategy from one that can liquidate the account.

You use it when you want to own the underlying but at a lower price, and you are willing to wait. The premium is payment for that wait. If price never falls you do not buy and you keep the premium; if it falls below the strike you buy at 555 with an effective cost of 552 thanks to the premium, which beats having bought at 580.

What it is not: a way to generate income on something you do not want. If you are assigned right as the market collapses and you did not want those shares, collecting $300 does not make up for owning $55,500 of something that keeps falling. The prior question is the covered call’s, inverted: "would I buy this at this price?"

How it is built

A single leg, and a capital condition that is half the strategy.

• Sell 1 out-of-the-money put, usually 0.15 to 0.30 delta and 30 to 45 days to expiry.
• Set aside strike × 100 in cash — $55,500 for the 555 put. That money is not used for anything else while the position is open.
• The strike is your target buying price, not the one that pays the most premium.

Without the cash set aside this is a naked put on margin. The broker only requires a fraction as collateral, so the position looks cheap and the potential loss is identical: buying 100 shares at 555 while the market falls. That is where premium sellers’ accounts blow up.

A full worked example

SPY at 580.00, 555-strike put with 45 days to expiry. Same model chain as the other pages.

Premium $300, effective cost if assigned $552.00 per share.

That 0.54% over 45 days annualises to 4.4%, which is roughly what the collateral would earn in Treasury bills with no risk at all. That is the real bar this strategy has to clear, and it does not always clear it: with implied volatility low, selling far puts collects less than the risk-free asset.

Maximum profit, maximum loss and break-evens

The profile is a shifted covered call: lots of small capped profit above, large open risk below. The difference from buying the shares outright is that you start 28 points lower.

• Maximum profit = premium collected = $300. Reached with price at 555 or above at expiry.
• Maximum loss = (strike − premium) × 100 = $55,200, if the underlying went to zero.
• Break-even = strike − premium = 555 − 3.00 = 552.00, 4.83% below the current price.
• Approximate probability of assignment = put delta ≈ 17.7%.

Compare the two routes: buying SPY today at 580 risks from 580; selling the 555 put risks from 552 and pays you $300 to wait. In exchange, if SPY runs to 620 without looking back, the outright purchase makes $4,000 and the sold put makes $300.

The position Greeks

A single short leg, with the Greeks inverted relative to buying it. Per contract:

The combination of negative gamma and negative vega explains why this strategy feels comfortable until it does not: in a sell-off, price moves against you, delta grows and implied volatility rises, and all three push the same way at once.

Management: when to close, when to roll

Close at 50% of the premium

Buying back at 1.50 captures half the profit in well under half the time and frees the collateral to start again. With small premiums commissions can make it not worth it; there, waiting for 75% is better.

If price approaches the strike

Decide whether you want the shares. If yes, do nothing: assignment is the plan. If not, roll down and out by buying back the 555 and selling a lower strike in a later expiry, usually for a small credit.

Do not roll indefinitely

Rolling a losing put three or four times in a row is refusing to accept a loss and extending the capital commitment each time. At some point, closing at a loss and freeing $55,500 is a better trade than collecting $200 a month against a broken thesis.

Early assignment

A deep in-the-money American put can be exercised before expiry. It does not change the arithmetic — you buy at the strike either way — but it pulls the cash outflow forward, so the money has to genuinely be there.

Common mistakes

Selling it without the cash

The broker allows it against a fraction of the capital and the position looks equally profitable. What changes is that a sharp fall triggers a margin call while the loss keeps growing, instead of simply making you a shareholder.

Picking the strike by the premium

Selling the 575 put instead of the 555 collects more than triple, and also makes it far likelier you end up buying at a price you did not want. The strike is a buying-price decision disguised as a premium decision.

Ignoring what the cash earns

At a 4.2% risk-free rate, the $55,500 tied up would earn about $285 over 45 days with no risk at all. Collecting $300 to take on the risk of buying SPY 28 points lower is a very thin margin, and that calculation almost never gets made.

Selling it on an underlying you do not want

The fattest premiums are paid by the most volatile underlyings, which are exactly the ones you least want to hold for months after an assignment.