======Cash-Secured Put======
A cash-secured put is an [[options]] trading strategy where an investor sells a [[put option]] while simultaneously setting aside enough cash to buy the underlying stock at the agreed-upon price. Think of it as making a firm offer to buy a stock you like, but only if it drops to a price you're happy with. In the meantime, you get paid a fee (the [[premium]]) just for making the offer. It’s a popular strategy among [[value investing|value investors]] because it offers two attractive potential outcomes: either you generate income on your cash, or you acquire a stock you wanted anyway at a discount to its current price. Unlike selling a [[naked put]], where you don't have the cash on hand to buy the shares, this "cash-secured" approach is a more conservative and disciplined way to engage with the options market, aligning perfectly with the principle of managing risk.
===== How Does It Work in Practice? =====
Selling a cash-secured put involves a few key components: you, the stock you want to own, a price you're willing to pay for it (the [[strike price]]), and a timeframe (the [[expiration date]]).
Let's imagine you're interested in buying shares of "Blue Sky Innovations," which currently trades at $52 per share. You've done your homework and believe it's a great company, but you'd feel much better buying it at $50.
Here's how you could use a cash-secured put:
  - **The Action:** You sell one put option contract for Blue Sky with a strike price of $50 that expires in one month. For selling this contract, you immediately receive a premium, let's say $1.50 per share. Since one options contract typically represents 100 shares, you collect $150 ($1.50 x 100).
  - **The "Cash-Secured" Part:** You must set aside $5,000 in your brokerage account ($50 strike price x 100 shares). This cash is your commitment, proving you can buy the shares if required.
Now, one of two things will happen by the expiration date:
  * **Scenario 1: The stock stays above $50.**
    If Blue Sky's price is $50.01 or higher at expiration, the option expires worthless. The buyer won't force you to purchase shares for $50 when they could sell them for more on the open market. **Result:** You keep the $150 premium, and your $5,000 is freed up. You made a 3% return on your secured cash ($150 / $5,000) in just one month!
  * **Scenario 2: The stock falls below $50.**
    If Blue Sky's price drops to, say, $48, the option will be [[exercised]]. You are now obligated to fulfill your end of the deal and buy 100 shares at the $50 strike price, costing you $5,000. **Result:** You now own 100 shares of a company you wanted. But here's the best part: your //effective// purchase price isn't $50. Because you received that $150 premium, your net cost is only $4,850 ($5,000 - $150), or **$48.50 per share**. You successfully bought the stock for less than your target price.
===== The Value Investor's Angle =====
This strategy is more than just a clever trick; it's a powerful tool for the patient investor. It systemizes the wisdom of legendary investors like [[Benjamin Graham]], who advocated for buying stocks with a [[margin of safety]].
==== Getting Paid to Wait ====
Value investing often involves a lot of waiting for the right price. Instead of letting your cash sit idle, selling cash-secured puts allows you to generate a steady stream of income. If the stock never drops to your price, you simply keep collecting premiums month after month, boosting your overall returns. This is often the first step in a popular income-generating method known as [[the wheel strategy]].
==== Buying Great Companies at a Discount ====
The core of the strategy is that **you only sell puts on companies you genuinely want to own for the long term at a price you have already determined is fair.** You're not gambling on short-term price movements. You are setting a disciplined entry point and getting paid for your patience. If you are assigned the stock, you're not disappointed; you're delighted because you've achieved your goal of buying a wonderful business at a wonderful price.
===== Key Risks to Consider =====
While relatively safe, this strategy isn't risk-free.
==== Opportunity Cost ====
If you sell a put on Blue Sky at $50 and the stock suddenly shoots up to $70, you don't participate in that massive gain. Your reward is capped at the premium you received. You might be happy with your income, but you missed a much bigger prize.
==== The Stock Price Could Plummet ====
This is the most significant risk. If Blue Sky's business fundamentals deteriorate and the stock price collapses to $30, you are still obligated to buy it at $50 per share. Your effective cost is $48.50, but you are now sitting on a substantial unrealized loss ($48.50 - $30 = $18.50 per share). This underscores the golden rule: **never sell a put on a company you wouldn't be thrilled to own.** Your initial research and conviction in the business are your ultimate safety net.
===== A Quick Checklist Before Selling a Cash-Secured Put =====
Before you begin, run through these simple questions:
  * **Fundamental Quality:** Is this a high-quality company I understand and want to own for years to come?
  * **Price Discipline:** Is the strike price a level at which I would be genuinely happy to become a shareholder?
  * **Cash Commitment:** Have I set aside the full amount of cash needed to purchase the shares if assigned?
  * **Risk Awareness:** Do I fully understand that I could miss out on upside gains or be forced to buy the stock at a price that could be well above its new, lower market value?