Cash-Secured Put Calculator

Search a symbol to visualize the potential profit and loss for a cash-secured put option strategy.

What is a cash-secured put?

AProfitLossStock Price
IncomeLimited ProfitNearly Unlimited Loss

A cash-secured put option is another basic option strategy that aims to provide small but consistent income, with the possibility of purchasing the underlying stock at some point. It is equivalent to a short put, but is often called a cash-secured put when the trader has enough cash to purchase 100 shares of the underlying, rather than trading using a margin loan.

Since a cash-secured or short put is the inverse of buying a long put, rather than being able to sell 100 shares at the strike if the put is in-the-money, you must be able to buy 100 shares. This means you should have a neutral to slightly-bearish short term outlook, but also a somewhat bullish long term outlook. In other words, you are looking for the stock to dip a bit so that you can buy in at a good price, and then hold for the long term.

If the stock price is below the strike price at expiration, the short put will be exercised by its owner and you will be assigned. You will then be forced to buy 100 shares of the stock at that strike price, using the money set aside (which is why it is called a "cash-secured" put).

If the stock doesn't expire below your strike price, you simply keep the premium (or credit) earned from selling the put. If you've traded long options before, you may know how easy it is for them to expire worthless. With a short put, the opposite is the case, where you actually want the put to expire worthless so that you can collect the premium.

You can earn a steady "rent" from selling the puts by repeating this process every month or every few months depending on how far out the expiration is. If you are assigned at some point, the cycle doesn't have to end there! There is another strategy called "The Wheel" which combines selling cash-secured puts and covered calls to create a constant income cycle.

Steps:

  1. Sell a put that is slightly out-of-the-money. If it is too far out-of-the-money, then the credit received will be very insignificant as you are taking on little risk. Likewise, a strike that is closer to being at-the-money will net a larger credit as there is a high chance you will be assigned and have to buy the stock. The strike you choose is dependent on how eager you are to purchase the stock, at what price you'd be comfortable buying it at, and how much risk you are willing to take on for the premium. When selling the put, you should be placing a "sell to open" order.
  2. Continue to keep enough cash reserves to buy the stock at your strike price, as it will be needed if you are assigned.

Goal:

There are two main goals for cash-secured puts, and you will likely favor one over the other depending on your risk-tolerance and outlook for the stock. You should be comfortable with either scenario happening though.

  • If you are hesitant about buying the stock, then you may want to choose a strike that is further out of the money. The goal is to make consistent income by selling puts, without having to buy the stock. In this case, you want the stock to go up, stay the same, or go down only a bit, but not below your strike. (However, if the stock goes up too much, you may find yourself wondering if you should have just bought the stock instead of selling puts)
  • If you are ready and willing to buy the stock, you can choose a strike that is not as far out of the money. This will net a greater credit as there is a greater chance that you will be assigned. The goal is to be assigned, and buy 100 shares of the stock at the strike price.

The Greeks:

Date: 30d remaining
Fri Aug 19th (now)Sat Sep 3rd (15d)Sat Sep 10th (23d)Expiration (30d)
Risk
AProfitLossStock Price
The risk profile looks similar to the profile of simply owning the stock, except for it is capped at the option premium.
Theta
A+-Stock Price
Theta is always positive for a short put. This is good if you are looking to buy back the put, as it will lose value as time passes. This is where the premium for short puts comes from, as the time value represents the extrinsic premium that you receive.
Delta
A+-Stock Price
Delta is always positive, meaning the strategy will gain value as the stock increases. The rate of gain decreases as the put becomes further out-of-the-money, since it will likely expire worthless and you will collect the full premium.
Vega
A+-Stock Price
An increase in volatility is harmful to the short put since vega is always negative. Selling cash-secured puts that have high volatility can be more profitable, but riskier. In case you want to buy back the put, you would want the volatility to be lower than what it was when you sold it.
Gamma
A+-Stock Price
Gamma (the rate of change for delta) is negative, meaning delta decreases as the stock increases.
Rho
A+-Stock Price
Rho is not a major factor with cash-secured puts. Increasing interest rates will cause the put to lose value, which could make it slightly cheaper to buy back if you need to do so.

Pros:

  • By selling cash-secured puts on fixed schedule (perhaps every 30 to 45 days), you can make consistent income every period. This credit is yours to keep, whether or not you are assigned. (Unless you roll or close the put early)
  • You can acquire the stock at a cheap price while also making regular income from the credits.
  • If assigned, the cost basis for your newly acquired stock will be lowered due to the credit you received from selling the put.

Cons:

  • If the stock falls below your strike and you change your mind about buying the stock, you may not be able to cheaply exit out of the trade early due to the cost of buying back the put.
  • If the stock rises significantly, then you may have been better off just buying the stock in the beginning rather than selling puts.
  • Getting into cash-secured puts can be expensive compared to other strategies, since you will need to set aside cash to purchase the shares if assigned. The credit that you collect for selling puts is small in comparison to the initial capital requirement.

Tips:

  • You should be aware of any major events that will affect the underlying stock price in the near future, such as earning announcements. These events will cause IV to be elevated, making the premiums higher since there is a higher chance of a large move. Higher premiums means you can earn a larger credit when selling puts, but you are also taking on much more risk.
  • If you'd like more time or want to adjust the strike, you can roll the put into a new put with a different strike and/or expiration. To do this, you simply close your cash-secured put by buying it back, and then sell a new cash-secured put. However, rolling is not a free way to get more time - when buying back your original put, you may lose money if it has since increased in value (usually because the stock went down). The new put could offset this loss, but your max profit will now be less as you are playing a game of catch up.
  • While we generally talk about getting assigned at expiration, it is possible for an American option to be assigned before expiration under certain conditions. Normally, there is no reason for this to happen as it wouldn't make sense for the option owner to forfeit the time value that is left on the option.
  • Since you will have to buy 100 shares if the stock goes below your strike at expiration, you should have a plan for what happens if the stock keeps going down. The goal is to get the stock at a good price and have it quickly bounce back, but that may not happen, and you could be losing money long after the put expires if you hold on to a falling stock.

The Math:

The breakeven for the cash-secured put strategy is simply the strike price minus the premium received for selling it. If the stock price is below the strike price, then you are losing money on the stock because you are buying it above market price. However, the premium received from selling the put will help offset that loss and lower the breakeven.

breakeven = strike price - option premium

The maximum profit is the same as the option premium. If the put expires worthless, you keep the whole premium and don't have to buy any stock.

max profit (without assignment) = option premium 

If you are assigned, the max profit has no limit since the stock can keep raising.

max profit (with assignment) = unlimited

This strategy has a nearly unlimited maximum loss, since you can be assigned and the stock can then fall to $0 in the worst case.