Cash Secured Put – Key Points About Selling Options Part 7
Cash Secured Put – Key Points About Selling Options (Part 7)
Cash secured put, one of the other most popular trades out there. It’s just like the naked put except you have the cash on hand. This is usually done, it’s undoubtedly done, if you don’t have a stock position. You might be looking to profit just from selling the option itself. Or, you might be looking at this as a way to get into a stock position, obligating yourself to buy shares at a strike price that you’re comfortable with. The goal here might be to actually be assigned to get stock below their current levels.
If you’re looking to buy stock at $65 it’s trading at $70, but you sell a put for a dollar or dollar and a half your net cost is actually going to be below that $65 level. So, it’s a way to try and get into the stock without having to buy shares at their current levels and effectively try and get them in a bit of a discount. There’s a difference. This isn’t exactly like working a limit order on stock. The difference is that limit orders get filled as soon as your price is touched. Options contracts are not going to fill you on the stock side unless it’s expiration date.
So, on the option here if the stock drops below the strike and then subsequently rallies, you probably don’t get assigned on that and don’t own the shares unless the stock is below the strike on expiration day. That’s not too big a concern because if you find yourself in that position, stocks a dollar or two below the strike, I really want these shares. Maybe you’ve got another week, week and a half until expiration. At that point, you can decide to go ahead and proactively close out the put and buy the stock.
I’m not sure what the profit and loss would look like on that. You might actually be buying the put for the same, or potentially even less than you sold it for, but the idea is if you find yourself there you can proactively go in and get stock right at the level you want it. Or, if you’re not too concerned about it wait to see where the stock goes and maybe get assigned at expiration. Those are the two most popular trades when it comes to selling options, the covered call and the cash secured put.