Selling a cash-secured put is a strategy that allows an investor to be paid a premium for the obligation to buy a particular stock at the put's strike price if he's assigned. This strategy provides him the opportunity to purchase an underlying security for a price that is lower than it is currently trading. The premium received for selling the put can give him some downside price protection by lowering his break-even point on the stock purchase, while placing no limit on how high the stock can be subsequently sold. On the upside, the investor's risk is one of opportunity loss if the stock increases, he's not assigned and shares are not purchased. But assigned or not, he keeps the put premium received.
By selling an out-of-the-money put an investor can select a target price for possible stock purchase if the stock price drops and assignment is received. On the other hand, by selling an in-the-money put he might be able to purchase underlying shares at a target price below current price levels, but without a drop in underlying stock price.
Note: Assignment prior to expiration
Many option professionals will exercise deep in-the-money puts before expiration when their current market premiums have little or no time value remaining. For this reason, investors with short positions in such puts might receive early assignment.
Cash-Secured Put Strategy Applet & Worksheet
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