What is a Cash Secured Put? Strategy, Example & Benefits Explained

What is Cash Secured Put?

A cash secured put is a strategy in options trading where an investor sells a put option while setting aside enough cash to buy the underlying stock if assigned. In simple terms, you're offering to buy a stock at a specified price (strike price), and you receive a premium for taking on that obligation. The "cash secured" part refers to the fact that you keep the full amount of money ready in case you have to purchase the shares.

This is often viewed as a more cautious approach to entering a stock position. Instead of buying the stock outright, the investor waits to see if the price falls to the desired level—earning a premium either way.
 

Meaning of Selling Put Options

When you sell a put option, you’re essentially saying, “I’m willing to buy this stock at a particular price by a certain date.” For taking on this obligation, the buyer of the put option pays you a premium. If the stock stays above the strike price, the option will likely expire worthless, and you keep the premium.

This forms the basis of the cash secured put strategy. You’re not just betting on the direction of the stock; you’re actively managing potential entry points into a position with added income.
 

What is Cash Secured Put Selling?

Cash secured put selling is the act of writing (selling) put options while simultaneously setting aside enough funds to fulfil the purchase if the option is exercised. For example, if you sell one put option contract for a stock priced at ₹500 with a strike price of ₹480, you must have ₹48,000 in cash ready (assuming one contract equals 100 shares).

This method of selling cash secured puts for income allows traders to earn consistent returns while waiting for the right price to buy a stock. It’s a strategy often paired with covered calls and cash secured puts to build a more robust income-generating portfolio.
 

Example of Cash Secured Put

Let’s say you're eyeing a company trading at ₹1,000 but would prefer to buy it at ₹950. You sell a put option with a strike price of ₹950 and receive a premium of ₹20 per share. You keep ₹95,000 aside to purchase 100 shares if the price falls.

There are two possible outcomes:

• Stock stays above ₹950 – The option expires worthless, and you pocket ₹2,000 (₹20 × 100).
• Stock falls below ₹950 – You buy the stock at ₹950, but effectively at ₹930 after accounting for the premium.

This real-world example shows how cash secured puts can either give you discounted stock or guaranteed premium income.

Strategies for Selling Secured Cash Put

Here are a few effective strategies used in cash secured put selling:

• Target Price Entry: Use puts to enter a stock at a lower, pre-determined price. This is ideal for value investors.
• Weekly Income Strategy: By selling weekly cash secured puts, investors collect frequent premiums on stable, low-volatility stocks.
• Combining with Covered Calls: Once assigned shares, you can write cash covered calls to further enhance income—creating a wheel strategy.
• Use in Down Markets: Sell puts on stocks you want to own during dips. If assigned, you get the shares at a lower cost basis.

Each of these strategies aligns with the broader goal of steady income and controlled stock acquisition.
 

What are the Risks Involved with Cash Secured Puts?

While this approach is more conservative than naked options, it’s not risk-free:

• Stock Could Drop Sharply: If the stock plummets, you're obligated to buy at the strike price, leading to immediate paper losses.
• Opportunity Cost: Capital is tied up. If the market rallies and the put isn’t assigned, your cash earns only the premium.
• Volatility Impact: Sudden spikes in implied volatility can lead to significant mark-to-market losses even if you're not assigned.

Choosing the best stocks for cash secured puts—typically those with strong fundamentals and low volatility—can mitigate many of these risks.
 

Benefits of Cash Secured Put

Here’s why many investors prefer the cash secured put strategy:

• Generates Income: You receive premiums regularly, especially when selling weekly cash secured puts.
• Discounted Entry: Stocks can be acquired at a lower effective price.
• Defined Risk: Unlike other options strategies, your maximum risk is clear—equal to the strike price minus the premium received.
• High Flexibility: Can be combined with covered calls and cash secured puts as part of a broader options portfolio.

These benefits make the strategy attractive to conservative investors, retirees, and those looking to enhance returns on idle cash.
 

Conclusion

The cash secured put is an excellent tool for investors aiming to generate passive income or acquire quality stocks at a discount. It balances income generation with capital protection, especially when applied to the best cash secured put stocks. While not without risks, careful implementation using the right cash secured put strategy may significantly improve portfolio returns over time.

For those just beginning their options journey, selling cash secured puts for income provides a straightforward and manageable entry into the world of derivatives.