Cash-Secured Put Strategy
The cash-secured put strategy is a popular way to generate income while potentially buying stocks at a discount. It's particularly suitable for investors who want to enter positions at lower prices while earning premium income.
Strategy Overview
Risk/Reward Profile
Premium received
Strike price - Premium received
Strike price - Premium received
Strategy Setup
When to Use This Strategy
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When you want to buy a stock at a lower price
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When you're bullish on a stock but want to reduce your entry price
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When implied volatility is high (higher premiums)
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When you have enough cash to cover the potential stock purchase
Risks to Consider
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Stock price could fall significantly below strike price
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Early assignment risk if stock price falls significantly
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Opportunity cost if stock price rises and you miss out on gains
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Cash is tied up until expiration or assignment
Note: This strategy explanation is for educational purposes only. Always do your own research and consider your risk tolerance before trading.
Example Trade
Lloyds Bank (LLOY) Cash-Secured Put
Current stock price: £45.00
Sell £42.50 put option (30 days to expiration)
Premium received: £1.20 per share
Trade Analysis:
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Maximum profit: £1.20 per share (premium received)
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Break-even point: £41.30 (£42.50 - £1.20)
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Maximum loss: £41.30 per share (if stock goes to zero)
Strategy Management
Rolling the Position
If the stock price approaches the strike price, you can roll the position by buying back the current put and selling a new put with a lower strike price and later expiration.
Early Assignment
If your put option is assigned early, you'll need to buy the shares at the strike price. This is not necessarily a bad outcome, as you've achieved your goal of buying the stock at a discount.
Adjusting for Market Changes
If the stock price falls significantly, you can buy back the put at a loss and either sell a new put at a lower strike or exit the position entirely.
Important: While cash-secured puts are considered a relatively conservative strategy, they still involve risk. Make sure you understand the strategy fully and are comfortable with the potential outcomes before trading.