FREE FARLAND CAPITAL RESOURCE
Cash-Secured Put Return: How to Calculate Yield
A cash-secured put has a simple cash-flow calculation, but the interpretation can become misleading when a short holding period is annualized as if the same opportunity will repeat all year.
Start with the cash obligation
For a fully cash-secured put, a conservative denominator is the cash needed to buy 100 shares at the strike, adjusted for the premium received if you want to calculate net effective capital at risk.
Simple period return
If a put sells for $2.00, the seller receives $200. On a $50 strike, the gross cash obligation is $5,000. The simple premium return on gross secured cash is $200 divided by $5,000, or 4%, before fees and taxes.
Effective purchase price
If assigned, the option premium lowers the economic purchase price. A $50 strike with $2 of premium has a $48 effective purchase price before commissions, fees and tax effects. That does not mean the stock cannot fall well below $48.
Be careful with annualization
Multiplying a 30-day return into a yearly figure assumes comparable trades can be repeated with comparable risk and without idle periods, losses, assignment, volatility changes or capacity constraints. The arithmetic can be correct while the business conclusion is unrealistic.
Compare return with downside
A richer premium generally exists because the market is pricing more uncertainty, less distance to the strike, more volatility or event risk. Return should never be evaluated without the possible stock obligation and portfolio concentration.
Use yield as one input
Yield can help compare otherwise similar opportunities, but the order of operations should be quality and willingness to own, liquidity, event risk, portfolio fit and then premium. A high annualized number is not an edge by itself.
Use the free Options Seller's Risk Checklist
Before selling premium, define the underlying, event risk, assignment plan, portfolio impact and exit rules.
Get the free checklist Explore the AcademyRelated Farland Capital guides
Selling Puts · Delta & Strike Selection · Options Trading Plan