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Cash-secured puts: premium in exchange for a purchase obligation.
When you sell a cash-secured put, you collect option premium and accept the obligation to buy shares at the strike price if assigned, while reserving enough cash to purchase those shares.
What the trade actually does
A short put is bullish to neutral exposure. If the option expires out of the money, the seller keeps the premium. If assignment occurs, the seller purchases the underlying at the strike. The premium reduces the effective economic purchase price, but it does not eliminate downside risk.
Why investors use cash-secured puts
The structure can be used when an investor is genuinely willing and financially able to own the underlying at the strike. Premium compensates the seller for taking that obligation. It should not be viewed as free income.
The important risks
- The underlying can fall far below the strike.
- Assignment can create a large concentrated stock position.
- Opportunity cost exists because cash is reserved.
- Volatility and event risk can make a seemingly conservative strike much riskier than expected.
Cash-secured versus a margin put
The option contract is the same. The financing and capital treatment are different. A cash-secured put reserves the purchase amount; a margin account may require much less buying power initially. Lower buying-power usage does not mean the economic downside disappeared, and margin requirements can expand during market stress.
What Farland Capital teaches students to decide before entry
Underlying quality, option liquidity, event risk, DTE, delta and strike, position size, portfolio concentration, buying-power impact, profit-management rules and what will happen if assignment occurs.
Educational purposes only. This is not a recommendation to use this or any other options strategy.