Cash Secured Puts 101 - A simple guide

What Are Cash Secured Puts (CSPs)?

Imagine you could make money just for agreeing to buy a stock you like at a lower price. That's what Cash Secured Puts (CSPs) are all about. This strategy is like selling insurance: you get paid for taking on a risk that you are comfortable with.

This is the main strategy I use, and the one that has brought me the most income and profits so far.

I’ll explain briefly what selling a CSP means, and in a future article i’ll explain what I do specifically. Meanwhile, you’ll learn the basics of this strategy.

How Cash Secured Puts Work

1. Sell a Put Option: Think of it as selling insurance. You agree to buy a stock at a set price in the future if its price drops.

2. Get Paid Upfront: You receive a premium (payment) right away, just like an insurance company gets paid when someone buys a policy.

3. Repeat Until You Buy the Stock: Keep selling puts until the stock price drops to your chosen level.

Real-Life Example: Chatting with a Friend About Buying Nvidia

Let's say you and a friend are discussing Nvidia (NVDA) stock, which is currently $127 per share. You are willing to buy it at a limit price of $110. Now, instead of placing an order to buy it at $110, you decide to sell a CSP. By doing this, you agree to buy Nvidia at $110 in the future and get paid for making this promise. You can keep doing this over and over until Nvidia drops towards the price that makes you comfortable buying at.

Why Use Cash Secured Puts?

• Earn Extra Money: You get paid the premium immediately.

• Low Maintenance: Set it up and watch it run without much effort.

• Manage Your Risk: You decide how much risk you want to take on.

• Buy at a Discount: If the stock price falls, you buy it at a lower price than it's worth now.

How to Start with Cash Secured Puts

1. Pick a Stock You Like: Choose a stock you wouldn't mind owning 100 shares of.

2. Fund Your Brokerage Account: Make sure you have enough money to buy the stock if needed.

3. Enable Options Trading: Your brokerage account should allow options trading and have cash secured puts enabled.

4. Sell the Put Option: Select a strike price below the current stock price and sell the put.

The Risks

Like selling insurance, there are risks:

• Stock Price Drops a Lot: If the stock's price falls much below the strike price, you'll buy it at a higher price than it's worth.

• Stock Doesn't Fall: If the stock price never falls to your strike price, you won't buy the stock but keep the premium. However, the premium will most likely be lower than the stock price increase.

• Market Swings: Sudden changes in the market can affect your strategy.

Simple Examples

1. Riot Platforms (RIOT) Example: Suppose RIOT is $9.50, and you have $1,000. You sell a put option with a strike price of $9.00, earning a $25 premium. If RIOT stays above $9.00, you keep the $25 and don’t have to buy the stock.

2. High-Priced Stock Example: For a stock priced at $200, selling a CSP with a lower strike price earns you a higher premium because the stock is more valuable and has more price swings.

Watching Your CSPs

Once you sell a CSP, you need to keep an eye on it:

• Stock Price Rises: The put option becomes less valuable, which is good for you. You can close it before it expires or hold to expiry.

• Near Expiration: The value of the option decreases, which is what you want.

• Stock Price Falls Below Strike Price: You might have to buy the stock at a higher price than its current value. You always have the choice to close at a loss if you think there might be further downside.

Conclusion

Cash Secured Puts are a great way to earn money and potentially buy stocks at a price you like. By understanding how they work, you can use CSPs to boost your investment income and manage your risk. Whether you’re new to investing or a seasoned pro, this strategy can help you reach your financial goals.