When you sell a put option, you can do it two ways: cash-secured or naked. Both collect premium, but they have very different risk profiles and capital requirements. This guide explains the difference and helps you decide which approach is right for you.
Quick Recap: What is Selling a Put?
When you sell a put, you collect premium in exchange for agreeing to buy 100 shares at the strike price if the option is exercised. You profit when the stock stays above your strike price.
Cash-Secured Put
A cash-secured put means you keep enough cash in your account to buy the shares if assigned. This is the safest way to sell puts.
Example: Cash-Secured Put
Stock XYZ is at $50. You sell a $45 put for $1.50.
- You collect $150 in premium
- You set aside $4,500 in cash (100 shares x $45 strike)
- If assigned, you buy shares with the cash you already have
- Your capital requirement: $4,500
- Your return on capital: $150 / $4,500 = 3.3%
Naked Put
A naked put means you sell the put using margin instead of cash. You do not set aside the full amount needed to buy shares. Your broker uses margin calculations to determine how much capital you need.
Example: Naked Put
Same trade: Stock XYZ at $50, sell $45 put for $1.50.
- You collect $150 in premium
- Margin requirement might be around $900-$1,200 (varies by broker)
- If assigned, you use margin to buy shares
- Your capital requirement: ~$1,000
- Your return on capital: $150 / $1,000 = 15%
Key Differences
| Cash-Secured | Naked | |
|---|---|---|
| Capital Required | Full strike x 100 | Margin only (~20%) |
| Account Type | Any account | Margin account |
| Approval Level | Basic (Level 1-2) | Higher (Level 3+) |
| ROI Potential | Lower | Higher |
| Risk Level | Lower | Higher |
The Risk is the Same (Sort Of)
Here is what many people get wrong: the dollar risk is the same for both strategies. If you sell a $45 put, your maximum loss is $45 per share minus premium (if the stock goes to zero). This is true whether you are cash-secured or naked.
The difference is leverage. With naked puts, you are using less capital to take the same risk. This means a bad trade hurts your account more on a percentage basis. If you have multiple naked puts and the market crashes, you could face margin calls.
Margin Calls: The Hidden Risk
When you sell naked puts, your broker can increase margin requirements if:
- The stock drops significantly
- Market volatility spikes
- Your overall account value decreases
If you cannot meet the margin call, your broker will close your positions at the worst possible time, locking in losses. This does not happen with cash-secured puts because you already have the money set aside.
When to Use Cash-Secured Puts
- You are new to selling puts
- You have a smaller account
- You want to sleep well at night
- You would be happy to own the stock at your strike price
- You do not want margin risk
When to Use Naked Puts
- You are experienced with options
- You have a larger account with margin cushion
- You understand and can manage margin requirements
- You want better capital efficiency
- You have strict risk management rules
Best Practices for Naked Puts
- Use only a portion of your margin: Never max out your buying power
- Keep cash reserves: Have enough to meet potential margin increases
- Diversify: Do not sell naked puts on just one stock
- Set stop losses: Buy back puts if they go against you
- Avoid earnings: Stocks can gap down hard on bad earnings
- Monitor daily: Check your positions and margin regularly
Rule of thumb: Only sell naked puts with capital you could fully secure if needed. If you would not be comfortable with a cash-secured put on that stock, do not sell it naked.
Example: How Leverage Amplifies Returns and Losses
Scenario: Sell $50 put for $2.00 premium
Cash-Secured:
- Capital used: $5,000
- Premium: $200
- Win: 4% return. Loss (stock to $40): -$800 (-16%)
Naked (20% margin):
- Capital used: $1,000
- Premium: $200
- Win: 20% return. Loss (stock to $40): -$800 (-80%)
Same dollar loss, but the naked put lost 80% of the capital deployed versus 16% for cash-secured.
Which Should You Choose?
For most traders, especially beginners, cash-secured puts are the better choice. Yes, the returns are lower, but you avoid the stress of margin calls and the temptation to over-leverage.
Naked puts make sense for experienced traders who have a system for managing risk, maintain adequate margin cushion, and never over-extend their positions.
Track All Your Put Trades
Pro Trader Dashboard tracks your cash-secured and naked put trades automatically. See your premium collected, assignment rate, and return on capital.
Summary
A naked put is a put sold using margin rather than cash. It offers better capital efficiency but comes with leverage risk and potential margin calls. Cash-secured puts require more capital but eliminate margin risk. Both have the same dollar risk if held to assignment. Most traders should start with cash-secured puts and only consider naked puts after gaining experience and understanding the risks.
Want to learn more? Check out short puts for the basics or credit spreads for a defined-risk alternative.