The Ultimate Guide To Selling Cash-Secured Puts

Cash-Secured Puts can turbocharge your portfolio's returns, here's how you can take advantage

December 12, 2022

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Today we’ll explore how to get paid while you wait by using cash-secured puts.

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The Ultimate Guide To Selling Cash-Secured Puts

Highlights

  • This article explains how to use cash-secured puts to generate income while waiting for stocks to hit an entry point

  • Cash-secured puts are a conservative options trading strategy that allows you to receive income by waiting to purchase stocks at a price you want.

  • The Greeks (especially Delta and Theta) are important metrics to understand when selling cash-secured puts.

Today we're going to explore cash-secured puts and how they can help us get paid while we wait for stocks to hit our entry point.

Cash-secured puts are a conservative options trading strategy that allows you to receive income by waiting to purchase stocks at a price you want. You can receive income from cash-secured puts as often as daily and it can combine with your dividend income and covered call income to kick your passive income streams into overdrive.

Unfortunately, most people don't try to use options to bolster their income.

They believe options trading is "too risky."

  • They tried to trade options before and lost badly

  • They don't understand what options are

  • They've never even heard of options

But today we're going to change that.

By the end of this issue, you'll be able to understand cash-secured puts and implement them in your portfolio for some extra gains.

Here's how to sell cash-secured puts step by step:

Step 1: Understand What A Put Option Is

To sell cash-secured puts, you have to understand what put options are and how they work.

A put option is a contract that gives the buyer the opportunity to sell 100 shares of a stock at an agreed-upon price.

To sell a cash-secured put, the seller (in this case, you) must hold the cash equivalent of 100 shares of the stock and has to buy the 100 shares if the stock reaches the agreed-upon price.

Just like with covered calls, as soon as you sell a cash-secured put, you collect what is known as a premium.

Step 2: Learn The Greeks

If you’ve read my guide on covered calls, you’re familiar with the Greeks.

The Greeks are the numbers that drive the behavior of an options contract.

There are 5 "Greeks" in total: Delta, Gamma, Theta, Vega, and Rho.

I recommend learning all of them, but for our purposes today we will be focusing on Delta and Theta.

Delta represents the sensitivity of an options price to changes in the value of the underlying security.

Delta is commonly used as the chance that a contract ends "in the money" (in the case of puts, stock price meets or is lower than the strike price).

For example, if an put option has a Delta of -0.2132, that means there's a 21.32% chance the option will end in the money.

Theta is the measure of how much an option should decrease in value after the day is done.

Theta should increase the closer you move to the expiration date of the contract.

For example, if Theta is -0.1552, the options contract should decrease in value by roughly $15.52 by the close of business that day.

Here's what the Greeks look like in an options contract:

Step 3: Hold The Cash Equivalent Of 100+ Shares Of A Stock

What makes a put “cash-secured” is having the cash to cover it.

Let's say we wanted to buy Apple at $136 per share. We can sell a cash-secured put with a strike price of $136 and receive a premium of $105 for doing so. By doing this, we must have $13,600 on hand which is the equivalent of 100 shares of Apple at $136. If Apple’s stock price closes at $136 or below on the date of expiration, we are obligated to buy 100 shares at $136.

If Apple closed at $136.01 or higher, we wouldn’t be obligated to buy any shares. We could roll that $105 premium we collected into more shares of Apple and lower our cost basis and sell another cash-secured put for next week.

Cash-secured puts are a great way to keep you disciplined and allow you to receive income while you wait for an entry price that you’re comfortable with.

Cash-Secured Put Possible Outcome Scenarios

When selling covered calls, there are 4 possible outcomes, let's take a look at each.

1. Stock ends in the money.

Let’s say you sell a cash-secured put on Apple today for a $136 strike price. If the stock closes at $136 or lower, you would be obligated to buy 100 shares at $136.

Make sure you actually want to hold 100 shares of whichever stock you choose and that you’re happy buying at the strike price!

2. Stock goes on a run. 

This one stings.

Let’s stick with our $136 Apple example. If Apple goes on a run and closes on Friday at $160, you would have missed out on all the gains from where it’s trading today (around $142 at time of publishing) to its new price of $160.

Stock prices rise and fall all of the time, so you may be able to get your $136 entry point someday, it may just take a while for the price to come down.

3. Stock does not end in the money.

This can be good for building income while you wait.

If Apple doesn’t reach the $136 strike price, you keep your cash & the premium. You can also go right back to selling another cash-secured put for the next week.

4. Stock’s price crashes.

Cash-secured puts do not allow you to take advantage of ultra low prices.

Sticking with our Apple example, if we sold a cash-secured put with a strike price of $136 and Apple stock tanks to $100 per share, we’d still have to buy 100 shares at the agreed upon $136 price.

If you have extra cash on the sidelines, you can scoop up additional shares at this lower precise point. If you have enough extra cash, you can even sell another cash-secured put at a lower strike price.

Some Tips I Use To Sell Cash-Secured Puts

  • Pick a strike price you’re comfortable with

  • Choose to sell cash-secured puts on stocks you’d be happy to own

  • Sell on red days because contracts become worth more

  • Hold some extra cash so if the stock tanks, you can still take advantage of lower prices

Final Thoughts

Cash-secured puts can turbocharge your portfolio's ability to produce passive income.

By understanding covered calls, cash-secured puts, and dividends, you now have a three-pronged passive income approach that you can use to make money on your own terms, not your boss’s terms.

Enjoy your newfound income stream!

Links & Memes

Here’s a super cool thread about the intersection of art and math:

I can tolerate a lot of things but don’t mess with my tater tots:

This past weekend Morocco knocked out Portugal in the World Cup and are set to play France. While I am heartbroken, this meme is hilarious:

Absolutely insane view of the Earth from 15,000 miles away:

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