Cash-Secured Put

Overview:

This strategy is executed by selling a put option, typically one that is out-of-the-money (that is, the strike price is below the current stock price). The investor will keep enough cash on hand just in case the put option is assigned.

Main Uses:

1. Investors sell puts and secure them with cash when they are moderately bullish on a name.  Rather than buying the stock outright, they sell the put and collect a small premium.  In this situation, the trader typically believes the stock will not appreciate by more than the premium collected.
2. Selling puts results in short vega positions.  So investors who are bullish on a stock’s prospects (and in addition think that implied volatility might decline) could sell puts.

Profit / Loss Cash-Secured Put:

The below graph is a profit/loss graph of a cash-secured put in Apple (AAPL) using the OptionsHouse profit/loss calculator (Note: this and other professional tools are available to all customers with a free virtual trading account). The current stock price is $196. A put option with a strike price of $185 was sold for $6.80. The investor will keep enough cash on hand to buy the stock if the put option is assigned, so the break-even price is $178.20. If the stock remains above $178.20, the investor will make money. If the stock decreases below $185, the investor will use the cash on hand to purchase the stock.

Recent Trading Ideas Using the Cash Secured Put  Strategy

Talbots, Inc. (TLB) Cash-Secured Put
Corinthian Colleges, Inc. (COCO) Cash-Secured Put
Northern Oil & Gas, Inc. (NOG) Cash-Secured Put
Silver Wheaton Corp. (SLW) Cash-Secured Put
Origin Agritech Ltd. (SEED) Cash-Secured Put

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