Cash Secured Puts (CSP) Strategy
A cash secured put is a conservative options strategy that allows you to get paid while waiting to buy stocks at your desired price.
Strategy Overview
What You Need
- Options-enabled trading account
- Cash equal to (Strike Price × 100) per contract
- Understanding of put options basics
Risk Level
Conservative
Similar risk to buying stocks outright, but with added premium income
Time Commitment
- Initial setup: 30 minutes
- Monitoring: 15 minutes/week
- Trade management: Monthly
How Cash Secured Puts Work
Think of cash secured puts like making an offer on a house below market price. You get paid for making the offer, and if the price drops to your offer, you buy the house.
What You Need:
- Cash to buy 100 shares at strike price
- Desire to own the stock at a lower price
- Options approval level 2 or higher
Real Example: Microsoft (MSFT) at $330
1. Set Aside Cash
Want to buy at $320, need $32,000 in cash secured
2. Sell the Put
Sell 1 put at $320 strike for $5.00 ($500 premium)
3. Possible Outcomes
- Stock stays above $320: Keep $500 premium
- Stock below $320: Buy shares at $320 (effective cost $315 after premium)
Step-by-Step Implementation
1. Stock Selection
Choose stocks that are:
- Companies you want to own long-term
- Trading at or near fair value
- Have good option liquidity
Pro Tip: Use our scanner to find stocks with
good CSP opportunities
2. Strike Price Selection
Consider these factors:
- 5-15% below current market price
- At technical support levels
- At prices you're willing to buy
Example: If stock is at $50, consider $45
strike for 10% discount
3. Expiration Selection
Optimal timeframes:
- 30-45 days for best premium decay
- Monthly options for better liquidity
- Consider earnings dates
4. Position Management
Monitor and manage by:
- Setting profit targets (50-75% of premium)
- Rolling puts if needed
- Being prepared for assignment
Real-World Example
Scenario: AAPL Trading at $170
Trade Setup:
- Sell 1 AAPL $160 Put (5.9% below market)
- 45 days to expiration
- Collect $3.50 premium ($350 total)
- Set aside $16,000 as collateral
Possible Outcomes:
If AAPL Stays Above $160
- Keep $350 premium
- 2.19% return on capital (45 days)
- 17.7% annualized return
If AAPL Falls Below $160
- Buy 100 shares at $160
- Keep $350 premium
- Effective cost basis: $156.50
Advanced Tips & Considerations
Portfolio Management
- Diversify across sectors
- Limit position size to 2-5% of portfolio
- Don't commit all cash to CSPs
Risk Management
- Avoid earnings dates when starting
- Use technical support levels
- Consider market conditions
Rolling Techniques
- Roll when delta reaches 70-80
- Roll to next monthly expiration
- Consider rolling down in strong drops
Tax Considerations
- Premium is short-term capital gains
- Assignment starts new holding period
- Consult tax professional