Cash-Secured Put

Overview

The Cash-Secured Put (CSP) is widely considered the first strategy a beginner should learn after simple stock buying. It is a way to tell the market: "I want to buy this stock, but only if it's 5% cheaper than it is today. And while I wait, you have to pay me."

By selling a put option, you take on the obligation to buy the shares at a specific price. To make it "Cash-Secured," you must keep enough cash in your account to actually fulfill that promise.

[!TIP] This is a Bullish/Neutral strategy. You want the stock to stay flat or go up. If it stays above your strike price, you keep the premium and walk away.

The Setup

A Cash-Secured Put consists of:

1. Short Put: Sell 1 OTM Put at Strike $K$.
2. Cash: Set aside cash equal to $\text{Strike} \times 100$.

Mechanics: The "Rent" Collector

• Scenario 1 (Stock Goes Up/Flat): The put expires worthless. You keep the premium. This is pure income.
• Scenario 2 (Stock Drops Slightly): The stock ends at $94 when your strike was$95. You are forced to buy the shares. However, because you collected premium upfront, your "effective" cost might be $93. You still got a deal!
• Scenario 3 (Stock Crashes): If the stock drops to $50, you still have to buy it at$95. This is the main risk.

Payoff and Break-even

Max Profit

The total premium you collected.

$$\text{Max Profit} = \text{Premium Received}$$

Max Loss

Nearly the entire value of the stock.

$$\text{Max Loss} = (\text{Strike} - \text{Premium}) \times 100$$

Break-even Point

The point where the stock price equals your net cost.

$$\text{Break-even} = \text{Strike} - \text{Premium}$$

The "Bullish Skew" Greeks

Short puts have a very specific risk profile that favors time passing.

1. Delta: Profitably Bullish

Shorting a put gives you positive Delta. You are betting on the stock not falling.

2. Theta: The Income Engine

This is why people trade CSPs. You have positive Theta, meaning you make money every single night while you sleep, as long as the stock price remains stable.

3. Vega: Short Volatility

You are "Short Vega." You want Implied Volatility to drop. If the market calms down, your short put becomes cheaper to buy back, allowing you to close the trade for a profit early.

When to Use?

• Entering a Position: You have cash and want to buy a stock "on sale."
• Income Generation: You want more yield than a savings account and are comfortable owning the underlying stock.
• The "Wheel" Strategy: This is Step 1 of the famous "Wheel" strategy (Sell a put until assigned, then sell calls on the shares).

Checklist for Entry

• Do I actually want to own this stock at this price?
• Do I have the cash to buy 100 shares if I'm assigned?
• Is the "Premium" worth the risk of a downside move?

Put-Call Parity: The Twin StrategyRead more

According to Put-Call Parity, a Cash-Secured Put is mathematically equivalent to a Covered Call at the same strike.

$$S + P = C + K e^{-rT}$$

When you sell a put, your P&L graph is identical to someone who owns the stock and sells a call. The only difference is the "optics" of the trade—one starts with shares, the other starts with cash.