What if you could get paid to buy stocks at lower prices? That is exactly what cash-secured puts offer. Instead of placing a limit order and waiting, you sell a put option and collect premium while you wait. If the stock drops to your target price, you buy it at a discount. If it does not, you keep the premium and try again.
What is a Cash Secured Put?
A cash-secured put (CSP) is when you sell a put option while holding enough cash to buy 100 shares if assigned. You are essentially agreeing to buy the stock at the strike price in exchange for immediate premium.
Think of it this way: Someone pays you to place a limit buy order. If the stock drops to your price, you buy it. If it stays higher, you keep the cash they paid you. Either outcome is a win if you picked the right stock.
How Cash Secured Puts Work
- Identify a stock you want to own at a lower price
- Sell a put at your desired purchase price (strike)
- Keep cash equal to strike price x 100 in your account
- Collect premium immediately
- Wait until expiration
Example: Selling a Cash Secured Put
You want to buy AAPL, currently at $175. You would be happy buying at $165.
- Current price: $175
- Sell the $165 put expiring in 45 days for $3.00
- Cash required: $16,500 (to buy 100 shares at $165)
- Premium collected: $300
Scenario 1 - Stock stays above $165: Put expires worthless. You keep $300 (1.8% return in 45 days = 14.6% annualized). No stock purchase. Sell another put.
Scenario 2 - Stock drops to $160: You get assigned at $165. Your effective cost: $162 ($165 - $3 premium). You now own AAPL at a 7.4% discount from the original $175 price.
Income Calculations
Let us calculate realistic income from selling cash-secured puts on different stocks.
Monthly Income Examples
| Stock | Price | Strike | Premium | Return |
|---|---|---|---|---|
| AAPL | $175 | $165 | $300 | 1.8%/mo |
| AMD | $120 | $110 | $350 | 3.2%/mo |
| MSFT | $400 | $380 | $550 | 1.4%/mo |
| SPY | $500 | $480 | $400 | 0.8%/mo |
**Key insight:** Higher volatility stocks like AMD pay more premium but have higher assignment risk. Lower volatility stocks like SPY pay less but are safer.
Choosing the Right Strike Price
Strike selection balances premium income with assignment risk.
- ATM puts (at the money): Highest premium (3-5%), but 50% chance of assignment
- 5% OTM puts: Good premium (1.5-3%), moderate assignment risk
- 10% OTM puts: Lower premium (0.5-1.5%), rare assignment
- Support levels: Sell puts at technical support for better risk/reward
A good rule: Only sell puts at prices where you would genuinely want to buy the stock. Never sell puts just for premium on stocks you would not want to own.
Choosing Expiration Dates
Time decay (theta) accelerates as options approach expiration. Here is how to optimize it:
- 30-45 days: Sweet spot for premium vs. time. Best theta decay rate.
- Weekly options: Higher annualized return but more management required
- 60+ days: More premium but slower decay. Ties up capital longer.
Expiration Comparison
NVDA at $500, selling the $475 put:
- Weekly (7 DTE): $2.50 premium = 0.5% (26% annualized)
- Monthly (30 DTE): $8.00 premium = 1.7% (20% annualized)
- 45 DTE: $10.00 premium = 2.1% (17% annualized)
Weekly options have higher annualized returns but require more active management and have higher transaction costs.
Managing Your Positions
Do not just set and forget. Active management improves results.
Taking Profits Early
When your put loses 50-75% of its value, consider buying it back. You capture most of the profit and free up capital for new trades.
Early Close Example
You sold a put for $3.00. After 20 days, it is worth $0.75.
- Buy to close at $0.75
- Profit: $2.25 (75% of max)
- Capital freed: 25 days early
- Sell a new put with that capital
Rolling When Challenged
If the stock drops near your strike, you can roll to avoid assignment:
- Buy back your current put
- Sell a new put at a lower strike and/or later expiration
- Try to collect additional credit when rolling
Risks to Understand
- Stock drops significantly: You buy at the strike, but the stock keeps falling. You have paper losses.
- Opportunity cost: Cash is tied up and cannot be used elsewhere
- Assignment happens: You must have cash available. Never sell puts without the capital to back them.
- Gap down risk: Stock can gap below your strike overnight on news
Best Practices for Cash Secured Puts
- Only sell on quality stocks: Companies you would happily own for years
- Diversify: Spread puts across multiple stocks and sectors
- Position sizing: No single position more than 20% of portfolio
- Avoid earnings: Close or roll puts before earnings announcements
- Track everything: Know your actual win rate and average return
Tax Considerations
Put premium is generally taxed as short-term capital gains. If you get assigned:
- The premium reduces your cost basis in the stock
- Holding period starts when you acquire shares
- If you hold shares 1+ year, future gains are long-term
Track Your Put Selling
Pro Trader Dashboard automatically tracks your cash-secured put performance. See premium collected, assignment rates, and total returns across all your positions.
Summary
Cash-secured puts let you get paid while waiting to buy stocks at lower prices. By selling puts on quality companies at prices you want to own them, you generate income whether or not you get assigned. Most traders earn 12-24% annually from consistent put selling on good stocks.
Ready to expand your income strategies? Learn how cash-secured puts fit into the wheel strategy or explore covered call income once you own shares.