How to Sell a Cash Secured Put
To sell a cash secured put, set aside the full cash needed to buy the shares, choose a strike at a price you would genuinely want to own them, and collect the premium for taking on that obligation. If the price falls below the strike you buy the shares, which has to be an acceptable outcome.
Selling a put is agreeing to buy shares at a set price until a set date, and being paid for the agreement. Secured means the cash to honor it is already set aside, which is the difference between a considered position and a leveraged one.
Before you start
The full cash to buy the shares, set aside and not doing anything else. A hundred shares at the strike. If that cash is committed elsewhere, the position is not secured.
A genuine willingness to own the underlying at the strike, tested honestly. The test is whether you would place a limit buy at that price today and be pleased if it filled.
A strike chosen as a price you would buy at, not as a premium you want. Reversing those two is the error that defines this strategy’s failures.
The steps
1. Choose the underlying you would hold anyway
The premium is small compensation for owning something you did not want. Start from the holding decision and let the option follow it.
2. Set the strike at a price you would buy
Not the strike with the best premium. The strike where, if you were assigned, your reaction is that you just bought shares at a price you liked.
3. Set the cash aside before selling anything
Strike times a hundred, per contract. Selling puts without that cash is a different strategy with a different risk profile and a margin call attached to it.
4. Choose an expiry you can wait out
Shorter expiries pay less per contract and more per unit of time, and they commit the cash for less time. Longer ones lock the money up while conditions change.
5. Do nothing while it is open
The two acceptable outcomes were both acceptable when you opened it. Watching the underlying dip toward the strike and closing early for a loss abandons the reasoning that justified the trade.
6. Take assignment as the deal working
If price falls below the strike you buy the shares. That was the agreement. Your effective cost is the strike less the premium, which is below the price you said you would pay.
7. Repeat only while the willingness is still real
The buy-price test gets re-applied at every new strike. A run of expiries where nothing was assigned is exactly the condition under which the test starts getting skipped.
How to tell it worked
The cash for 100 shares per contract was set aside before the sale, and is untouched.
The strike is a price you would place a limit buy at today, tested before selling.
The position has been adjusted 0 times since it was opened.
And if assigned, your reaction was that you bought at a price you wanted, not that something failed.
What the premium actually pays for
It pays for accepting a defined obligation. Your maximum gain is the premium, whatever happens above the strike. Your exposure below the strike is the same as owning the shares, less the premium.
On an illiquid option the spread can be a meaningful share of the premium. Since the premium is the entire upside, that is a direct reduction of the only gain available.
The shape nobody looks at
Most expiries end with the premium kept and nothing else happening. That is the design, and it is why the strategy produces a long run of small, similar results.
The infrequent outcome is large and arrives as a holding. Price falls well below the strike, you buy at the strike, and you now own shares worth less than you paid — with a premium that covers a small part of the difference.
Which means a run of successful expiries is not evidence the strike was well chosen. It is what the strategy does. The test of the strike is what happens on the assignment, and by then the choice was made months earlier.
The original data
Of the 24,971 unique videos in the search study behind this site, 8 mention this strategy in the title, at a median of 30,048 views across 7 channels, and 50% of those titles are instruction-shaped. Options generally appear in 1,061 at 9,476. No video is counted twice, however many searches surfaced it.
8 videos at 30,048, three times the audience per video of options coverage generally. A concentrated subject with a specific appeal, and the appeal is the premium — which is the half of the trade that is not the risk.
The question: 12 expiries in a row kept the premium. Raise the strike?
The answer is that a run of kept premiums is the base case. The S&P 500 finished higher over 59% of all ten-trading-day windows since 1950, so most short windows end without a large fall. Raising the strike raises the premium and moves the buy price above what you said you would pay, which is the test failing rather than the strategy improving.
When it fails
The failure is drift in the strike, and every individual step is small. Twelve expiries pass uneventfully, the premium starts to look like the point, and each new strike sits a little closer to the current price because that pays more. Nobody re-applies the buy-price test. Then a real decline arrives and delivers shares at a price nobody would have chosen, in a size set by how much cash was available rather than by how much of that company you wanted.
The second failure is selling without the cash. That is a leveraged position.
A third is choosing the strike by premium. The obligation is the trade.
A fourth is closing early on a dip. Both outcomes were acceptable at the open.
A fifth is an illiquid contract. The spread comes out of the only upside.
And a sixth is treating assignment as a failure. It is the agreement being honored.
Related
Cash secured put covers the structure in detail. Wheel strategy is what this becomes when it is run continuously. And assignment is the mechanic that delivers the shares.
My honesty test is whether I would place a limit buy order at that strike today, with the same cash, and be pleased if it filled. If the answer is no, I am selling the put for the premium and pretending the obligation is theoretical. That is the position that eventually delivers shares nobody wanted.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.