Selling cash secured puts on stocks an investor is happy to take ownership of is a great way to generate some extra income. A cash-secured put involves writing an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock. The goal is to either have the put expire worthless and keep the premium, or to be assigned and acquire the stock below the current price. It’s important that anyone selling puts understands that they may be assigned 100 shares at the strike price.
Why Trade Cash Secured Puts?
Selling cash secured puts is a bullish trade but slightly less bullish than outright stock ownership. If the investor was strongly bullish, they would prefer to look at strategies like a long call, a bull call spread, or a poor man’s covered call. Investors would sell a put on a stock they think will stay flat, rise slightly, or at worst not drop too much.
Cash secured put sellers set aside enough capital to purchase the shares and are happy to take ownership of the stock if called upon to do so by the put buyer. Naked put sellers, on the other hand, have no intention of taking ownership of the stock and are purely looking to generate premium from option selling strategies.
The more bullish the cash secure put investor is, the closer they should sell the put to the current stock price. This will generate the most amount of premium and also increase the chances of the put being assigned. Selling deep-out-of-the-money puts generates the smallest amount of premium and is less likely to see the put assigned.
RKT Cash Secure Put Example
Yesterday, with Rocket Companies (RKT) trading at $21.22, the February put option with a strike price of $200 was trading around $0.71. Traders selling this put would receive $71 in option premium. In return for receiving this premium, they have an obligation to buy 100 shares of RKT for $20. By February 20, if RKT is trading for $19, or $18, or even $10, the put seller still has to buy 100 shares at $20.
But, if RKT is trading above $20, the put option expires worthless, and the trader keeps the $71 option premium. The net capital at risk is equal to the strike price of $20, less the $0.71 in option premium. So, if assigned, the net cost basis will be $19.29. That’s a 9.10% discount from the price it was trading yesterday.
