What is a cash-secured put?
A cash-secured put is a bullish options strategy with limited profit potential. If the underlying asset's price settles above the strike price at expiration, the short put will be profitable. Some traders call this approach a “short put” strategy. Selling an option without owning the shares is considered "naked" because you don't have any risk protection if the stock moves against you.
A put option is a type of security that gives the owner the right to sell a stock at a certain price. When you write a cash-secured put, you are agreeing to buy 100 shares of the underlying stock at the strike price, if it is assigned. This means that you must have enough cash in your account to cover this purchase, should it occur.
When you initiate a cash-secured put position, you receive credit at the time of trade entry, which is called the premium. Traders receive more credit the closer the strike price is to the underlying stock's price.
When to use a cash-secured put strategy
Selling a cash-secured put makes sense when a trader believes the price of the underlying asset will trade above the strike price on or before the expiration date. It also makes sense if you want to eventually buy the underlying stock. When you sell a put option, you earn a premium which reduces the cost basis of shares when you initiate a long position in the event that the put is eventually assigned.
How to manage a cash-secured put position
After selling puts, time decay (the decrease in an option's value as it approaches expiration) naturally works in your favor. Put sellers will also want implied volatility to go down. As a seller, you want the price of the option you sold to approach zero, and time decay and a decrease in implied volatility both contribute to lowering the price of the option you sold.
Cash-secured put maximum profit potential
The potential profit from selling a put is limited to the premium you receive for selling the put. It is important to know that in the event the puts you sell are assigned and you find yourself needing to buy the stock, your potential profit changes to a long-stock position.
Cash-secured put maximum loss potential
Be aware that if you use a cash-secured put strategy, you could lose a lot of money if the stock price goes to zero. However, the loss would be limited to the strike price. If the puts you sold get assigned, then your potential loss changes to a long-stock position.