Imagine you’re about to buy the new iPhone. It costs €1,000. But you, being financially savvy, tell the shop assistant: I’ll buy it, but only when it drops to €900 next month. And on top of that, the shop assistant pays you €50 for committing to it. Sounds weird, right? Who’s going to pay you to wait and buy something cheaper? Welcome to the options market. This is called a Cash Secured Put.
What is a Cash Secured Put?
Let’s skip the boring technical jargon. A Cash Secured Put is basically a limit order on steroids. When we want to buy a stock, the usual move is to place a limit order at a lower price and sit back to wait. If it never drops, we’ve wasted our time and our money has been sitting there gathering dust, generating nothing for us.
With the Cash Secured Put we flip the script. We don’t buy the option — we sell it. We become the insurance company. By selling a put, we’re signing a contract with another person: we tell them “don’t worry, if the stock falls to a certain price, I commit to buying them from you”. For that promise, for that obligation we take on, the market pays us cold hard cash that lands directly in our account today.
Real example: Cash Secured Put on PayPal
Let’s imagine we’ve had our eye on PayPal for a while. We like the company, we believe the payments sector has a future, but it’s trading right now at around $62. We think: sure, at $62 it’s a bit pricey, but if it dropped a little more — say to $57 — that’s where I’d get in, that would be a good price for me.
With regular shares, we’d place a limit order at $57 and wait. If it never drops, we look silly and our money earns 0%. But with the Cash Secured Put we do the following:
- We head to the options market and look for an expiration around 30-40 days out
- We sell the put with a strike of $57.50, which is the price we’re willing to buy at
- Just for doing this, for committing, the market pays us around $100 in premium today
For this trade, Interactive Brokers will require margin from us. Normally it’s not 100% of the $5,750 it would cost to buy the shares, but as expiration approaches and the option gets deeper in the money, they’ll ask for larger collateral. That’s why you always have to have the money available.
The two possible scenarios
Scenario 1: PayPal doesn’t drop enough
The 30-odd days go by and PayPal stays around $60, rises to $65 or even drops a little but holds at $58. Since it didn’t close below our strike of $57.50, the obligation disappears. The result? We keep the entire premium — the $100 — and the collateral they required is released. Back to the start.
Let’s run the numbers: we’ve made a return of almost 1.7% in 40 days on the committed capital. Annualized, that’s almost 15%. And all of that without the stock having to rise — simply because it didn’t fall to our strike.
Scenario 2: PayPal falls hard
Bad news comes out and the stock goes to $55. Here’s where our obligation kicks in: we have to buy the 100 shares at $57.50. But notice the magic of this trade: since we were paid $1 per share at the start, our real purchase price — our breakeven — is $56.50.
Whoever bought regular shares at the start when they were at $62 is already losing from much higher up. We only start losing below $56.50. We have a huge safety cushion, we bought the company we wanted much cheaper and, on top of that, partially financed by the premium.
The deadly trap the gurus won’t tell you about
So far this all sounds like heavenly music, but it isn’t entirely so. And here’s where the cold shower comes.
The golden rule of this strategy is simple: never sell a put on a stock you wouldn’t mind holding in your portfolio for the next 5 years. If you don’t like the company, don’t sell the put just for the premium. That’s picking up coins in front of a steamroller.
How to execute it in ProRealTime step by step
Let’s see it on the ProRealTime platform, which with version 13 has everything you need to trade options professionally:
- We choose the underlying — in this case PayPal — and go to the options chain
- We choose the expiration, aiming for around 30-40 days so that time always works in our favor
- We look for the $57.50 strike on the puts side
- We click on the BID and it generates the order, showing the $100 we’re going to collect in premium
What comes after mastering this strategy?
The Cash Secured Put is the foundation, the first brick. If you master this, you’ll then be able to run more complex strategies like the Wheel Strategy, which combines selling puts with selling covered calls to generate recurring income. But it all starts here.
Rules of the Cash Secured Put
Only on stocks you want to hold in your portfolio for the long term
Always have the capital available to buy the shares if you get assigned
Expirations of 30-40 days to maximize theta in your favor
Choose strikes below the current price — that’s your discount price
Don’t chase high premiums in companies you don’t know — that’s picking up coins in front of a steamroller
Conclusion
The Cash Secured Put isn’t quick money — it’s making patience pay. You collect premiums for waiting to buy stocks you already like, at a price that already looks good to you, and on top of that with a safety cushion the traditional share buyer doesn’t have. If the stock doesn’t drop, you keep the premium and repeat. If it drops, you buy the company you wanted at a discount. In both scenarios, you’re better off than the investor who simply placed a limit order and sat waiting at 0%.
