What is a Cash Secured Put? Selling cash secured puts are considered an investment derivative.
Selling option puts makes sense if you an investor who would like to acquire shares in a particular stock or ETF at a discounted rate to today's prices.
Other names associated with cash secured puts are "short a put", and "being naked a put".
Selling puts work best in a neutral to a tightly traded range bound market.
Selling a cash secured put is one of the most conservative option strategies available.
By selling a put option, you will be obliged to buy underlying shares if assigned, at any time regardless of how low the shares are trading.
The net price paid for underlying shares on assignment is equal to the put's strike price minus the premium received for selling the put.
For this reason, the strike price chosen, less the premium amount received should reflect the investor's target price for buying underlying shares.
Regardless of the direction the stock price takes after the put is sold, the put seller keeps the premium.
You receive the money the premium generates within 3 trading days in your account, often your account is credited instantly.
While the cash in your account is on deposit, it may be invested in short-term or long term interest-bearing instruments such as CDS, a money market or bond fund.
Many individual investors find selling puts as "buying a stock on sale.
" An investor who writes a put contract at the same time deposits the full cash amount for a possible purchase of underlying shares in his brokerage account.
The purpose of depositing money is to ensure that money is available should they be assigned.
This is also considered "being short" a stock.
The investor who has the short put position is obligated to purchase shares at the put's strike price.
Here's an example of a trade: If you sold a 40 put for $1, you must have $4,000 cash in your account.
Since 1 option equals 100 shares, this would enable you to purchase 100 shares of stock for $40 if you are assigned.
The maximum profit is the credit that you took into your account; in this case $100.
You will make $1.
00, but you also will be assigned and have to purchase the stock if the stock falls below $39 per share.
Most traders however will close out the position prior to expiration if they can buy back the option for a much lower price than they sold it.
For instance, selling the put for $1.
00, and buying back for $.
15.
When you buy or sell an option, 1 call or put equals 100 shares.
If the stock declines significantly below the price by expiration, on assignment the investor may be obligated to purchase shares at the strike price, thus they will have incurred a loss.
However, any investor whose motivation in writing a cash-secured put is to buy underlying stock.
In effect, you were paid a premium for taking the risk of being obligated to purchasing it.
Therefore the investor should be committed in advance to a target price for a possible purchase.
An investor should also consider the risk is of opportunity loss.
After premium received selling the put, the underlying stock price can go up and remain above the put's strike price.
The put seller, however only keeps the put sale.
Selling cash secured option puts are ideal in a non volatile market as time decay will decrease the price of an option; allowing the trader to repurchase it at a lower price and recognize a profit.
This material is being provided to you for educational purposes only.
This information neither is, nor should be construed, as an offer, or a solicitation of an offer, to buy or sell securities by InvestorZoo.
com/Seattle Media Works LLC.
InvestorZoo.
com/Seattle Media Works LLC does not offer or provide any investment advice or opinion regarding the nature, potential, value, suitability or profitability of any particular investment or investment strategy, and you shall be fully responsible for any investment decisions you make, and such decisions will be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs.
Selling option puts makes sense if you an investor who would like to acquire shares in a particular stock or ETF at a discounted rate to today's prices.
Other names associated with cash secured puts are "short a put", and "being naked a put".
Selling puts work best in a neutral to a tightly traded range bound market.
Selling a cash secured put is one of the most conservative option strategies available.
By selling a put option, you will be obliged to buy underlying shares if assigned, at any time regardless of how low the shares are trading.
The net price paid for underlying shares on assignment is equal to the put's strike price minus the premium received for selling the put.
For this reason, the strike price chosen, less the premium amount received should reflect the investor's target price for buying underlying shares.
Regardless of the direction the stock price takes after the put is sold, the put seller keeps the premium.
You receive the money the premium generates within 3 trading days in your account, often your account is credited instantly.
While the cash in your account is on deposit, it may be invested in short-term or long term interest-bearing instruments such as CDS, a money market or bond fund.
Many individual investors find selling puts as "buying a stock on sale.
" An investor who writes a put contract at the same time deposits the full cash amount for a possible purchase of underlying shares in his brokerage account.
The purpose of depositing money is to ensure that money is available should they be assigned.
This is also considered "being short" a stock.
The investor who has the short put position is obligated to purchase shares at the put's strike price.
Here's an example of a trade: If you sold a 40 put for $1, you must have $4,000 cash in your account.
Since 1 option equals 100 shares, this would enable you to purchase 100 shares of stock for $40 if you are assigned.
The maximum profit is the credit that you took into your account; in this case $100.
You will make $1.
00, but you also will be assigned and have to purchase the stock if the stock falls below $39 per share.
Most traders however will close out the position prior to expiration if they can buy back the option for a much lower price than they sold it.
For instance, selling the put for $1.
00, and buying back for $.
15.
When you buy or sell an option, 1 call or put equals 100 shares.
If the stock declines significantly below the price by expiration, on assignment the investor may be obligated to purchase shares at the strike price, thus they will have incurred a loss.
However, any investor whose motivation in writing a cash-secured put is to buy underlying stock.
In effect, you were paid a premium for taking the risk of being obligated to purchasing it.
Therefore the investor should be committed in advance to a target price for a possible purchase.
An investor should also consider the risk is of opportunity loss.
After premium received selling the put, the underlying stock price can go up and remain above the put's strike price.
The put seller, however only keeps the put sale.
Selling cash secured option puts are ideal in a non volatile market as time decay will decrease the price of an option; allowing the trader to repurchase it at a lower price and recognize a profit.
This material is being provided to you for educational purposes only.
This information neither is, nor should be construed, as an offer, or a solicitation of an offer, to buy or sell securities by InvestorZoo.
com/Seattle Media Works LLC.
InvestorZoo.
com/Seattle Media Works LLC does not offer or provide any investment advice or opinion regarding the nature, potential, value, suitability or profitability of any particular investment or investment strategy, and you shall be fully responsible for any investment decisions you make, and such decisions will be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs.