I have some experience with trading but still get a bit confused about options. I keep hearing the term cash secured put and I’m not clear on the details.
I believe it involves having enough funds available to buy the stock if it gets assigned. What are the key risks and benefits of this strategy compared to simply purchasing shares?
You set aside cash for 100 shares at the strike price. It’s a safety net.
My biggest mistake? Jumping into cash secured puts without really getting assignment risk.
Got assigned on a tech stock at $45 and watched it keep tanking. Lost way more than what I made from the premium.
Now I only do this with stocks I’d actually want to own long-term.
Sell a put option and hold cash for 100 shares at the strike price. Receive the premium immediately. Assignment means purchasing at the strike price regardless of market value.
Setting a cash secured put is like placing a limit buy order while earning a premium. The premium is yours immediately, and assignment means you buy at your target price. Be aware that if the stock rises significantly, you’ll miss out on those gains since you do not own the shares yet. This strategy only works if you’re ready to own the stock eventually.
Cash secured puts are simple. Set aside enough money to buy 100 shares at your strike price. If the stock goes below that price, you will buy the shares. If it stays above, you keep the premium from selling the put option. The advantage is you earn upfront and could buy shares at a lower price. The risk is you might own a declining stock. Compared to just buying shares, you gain immediate cash but miss out on big price jumps. This strategy works well if you plan to own the stock for a long time.