Basic Options Strategies: Cash Secured Put

---

Basic Options Strategies: Cash Secured Put
According to the terms of a put contract, a put writer is obligated to purchase an equivalent number of underlying shares at the put’s strike price if assigned an exercise notice on the written contract.

Many investors write puts because they are willing to be assigned and acquire shares of the underlying stock in exchange for the premium received from the put’s sale. For this discussion, a put writer’s position will be considered as "cash-secured" if he has on deposit with his brokerage firm a cash amount (or equivalent) sufficient to cover such a purchase.


Market Opinion?
Neutral to Slightly Bullish

When to Use?
There are two key motivations for employing this strategy: either as an attempt to purchase underlying shares below the current market price, or to collect and keep premium from the sale of puts which expire out-of-the-money and with no value.

An investor should write a cash secured put only when he would be comfortable owning underlying shares, because assignment is always possible at any time before the put expires. In addition, he should be satisfied that the net cost for the shares will be at a satisfactory entry point if he is assigned an exercise.

The number of put contracts written should correspond to the number of shares the investor is comfortable and financially capable of purchasing. While assignment may not be the objective at times, it should not be a financial burden. This strategy can become speculative when more puts are written than the equivalent number of shares desired to own.



Benefit
The put writer collects and keeps the premium from the put’s sale, no matter how much the stock increases or decreases in price. If the writer is assigned, he is then obligated to purchase an equivalent amount of underlying shares at the put’s strike price. The premium received from the put’s sale will partially offset the purchase price for the stock, and can result in a purchase of shares below the current market price.

If the underlying stock price declines significantly and the put writer is assigned, the purchase price for the shares can be above current market price. In this case, the put writer will have an unrealized loss due to the high stock purchase price, but will have upside profit potential if retaining the purchased shares.


Continued In Part Two...
"

---

View The Options Industry Council's post archive >