How to Sell Put Options: Cash-Secured Puts and Premium Income

Selling put options is one of the most popular income strategies among options traders. When done correctly, it allows you to collect premium while potentially buying stocks you want to own at a discount. This guide explains everything you need to know about selling puts, from cash-secured puts to risk management techniques.

What Does Selling a Put Option Mean?

When you sell a put option, you give someone else the right to sell you 100 shares of a stock at a specific price (strike price) before a certain date (expiration). In exchange for taking on this obligation, you receive a premium payment immediately. Your goal is for the stock to stay above the strike price so the option expires worthless.

Cash-Secured Puts vs Naked Puts

There are two approaches to selling puts:

Cash-Secured Puts (Recommended)

A cash-secured put means you have enough cash in your account to buy the shares if assigned:

• Requires cash equal to (Strike Price x 100) per contract
• Lower risk since you can afford the shares
• Great way to buy stocks you want at a discount
• Approved for most brokerage accounts

Naked Puts (Higher Risk)

Naked puts are sold without sufficient cash to cover assignment:

• Uses margin instead of cash collateral
• Higher risk if stock drops significantly
• Requires margin account with options approval
• Better for experienced traders only

Why Traders Sell Put Options

Selling puts offers several advantages:

• Income generation: Collect premium whether you get assigned or not
• Buy at a discount: Get paid while waiting to buy stocks cheaper
• Time decay advantage: Theta works in your favor as the seller
• High win rate: Out-of-the-money puts often expire worthless
• Flexibility: Choose any strike price and expiration

Selecting the Right Strike Price

Your strike price choice determines your risk and reward:

• At-the-money (ATM): Highest premium but 50% chance of assignment
• Out-of-the-money (OTM): Lower premium but stock has room to drop
• Deep OTM: Very low premium but highest probability of profit

Delta as a Guide

Many traders use delta to select strikes:

• 0.30 delta: Approximately 30% chance of assignment, good premium
• 0.20 delta: Approximately 20% chance of assignment, lower premium
• 0.10 delta: Approximately 10% chance of assignment, minimal premium

Choosing Expiration Dates

The expiration date affects premium and management:

• Weekly options (7 days): Quick turnover but lower total premium
• 30-45 days out: Optimal time decay, most popular timeframe
• 60+ days out: Higher premium but capital tied up longer

Understanding Assignment

Assignment is when you are required to buy the shares:

• When it happens: Usually at expiration if the put is in-the-money
• Early assignment: Rare for puts, but can happen
• What to do: Keep the shares, sell a covered call, or sell the shares

Calculating Profit and Loss

Understanding your potential outcomes:

• Maximum profit: Premium received (if option expires worthless)
• Breakeven: Strike price minus premium received
• Maximum loss: (Strike price - Premium received) x 100 if stock goes to zero

Managing Your Put Selling Positions

Active management improves results:

• Close at 50% profit: Buy back the put when it loses half its value
• Roll down: If stock drops, close and sell a lower strike
• Roll out: If expiration nears, extend to a further date
• Accept assignment: If you like the stock, take the shares
• Close for a loss: Cut losses if the trade moves significantly against you

The Wheel Strategy

Many traders combine selling puts with covered calls in a continuous cycle:

• Sell cash-secured puts on a stock you want to own
• If assigned, sell covered calls on the shares
• If shares get called away, start selling puts again
• Collect premium throughout the cycle

Risk Management for Put Sellers

Follow these guidelines to protect your capital:

• Only sell on stocks you want to own: Be happy if assigned
• Size positions appropriately: Never overcommit your capital
• Diversify strikes and expirations: Spread risk across multiple positions
• Avoid earnings: Volatility can cause unexpected moves
• Have an exit plan: Know when you will close or roll positions

Common Mistakes to Avoid

New put sellers often make these errors:

• Selling puts on bad stocks: Only sell on quality companies you would own
• Overallocating capital: Keep cash reserves for other opportunities
• Ignoring assignment: Have a plan for what to do with assigned shares
• Chasing premium: High premiums usually mean high risk
• Not managing losers: Cut losses before they become catastrophic

Tax Implications

Understand the tax treatment of put selling:

• Premium received is typically short-term capital gains
• If assigned, premium reduces your cost basis in the shares
• Consult a tax professional for your specific situation

Summary

Selling put options is an excellent strategy for generating income and potentially buying stocks at a discount. By focusing on cash-secured puts, choosing quality stocks, and managing positions actively, you can build a consistent income stream from your options trading. Remember to only sell puts on stocks you would be happy to own and always maintain proper position sizing.

Continue learning with our cash-secured puts guide or explore the wheel strategy for a comprehensive income approach.