A secured put option is
Glossary Selling cash-secured puts on Stock you want to buy What if you could buy stocks lower than the current market price?
If either of those scenarios sounds appealing to you, then perhaps you should consider selling a cash-secured put. But selling a cash-secured put gives work on options without investment another method of buying the stock below the current market price, with the added benefit of receiving the premium from the sale of the put.
How to do it Sell an out-of-the-money put strike price below the stock price. In order to receive a desirable premium, a time frame to shoot for when selling the put is anywhere from days from expiration. This will enable you to take advantage of accelerating time decay on the option's price as expiration approaches and hopefully provide enough premium to be worth your while.
But what you consider a good return is up to you. Ideally, you want the stock price to dip slightly below the strike price, and stay there until expiration.
Selling cash-secured puts on Stock you want to buy
The premium received from selling the put can be applied to the cost of the shares, ultimately lowering the cost basis of the stock purchase. How might this trade pan out? The bad news is you were wrong about the short-term movement of the stock. Plus, the cash you used to secure your put will be available to you for other trades.
But look at the bright side. That would be worse, right?
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- Articles Cash-secured Puts Many investors shy away from selling puts because the strategy is viewed as too risky.
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- Back in Junewhen the percentage of my portfolio invested in stocks was close to reach a trigger point for rebalancing, I wrote this post: Sell Cash-Secured Puts: Get Paid for Your Rebalancing Commitment.
Plus, now that you own the stock, it might make a rebound. Scenario 4: The stock completely tanks A secured put option is is obviously the worst-case scenario.
To understand what a cash secured put options strategy is, you need to have a fundamental understanding of stock options. If the contract allows the optionholder to sell the security, it is a put option. In a cash secured put options strategy, you sell a put option for a security that you would like to perhaps purchase, but at a lower price than it is currently trading at.
But what if the stock does completely tank? There are a couple of things you can do.
If you doubt the stock will make a recovery, your other choice is to close your position prior to expiration. That will remove any obligation you have to buy the stock. To close your position, simply buy back the strike put.
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Keep in mind, the further the stock price goes down, the more expensive that will be. This scenario demonstrates the importance of having a stop-loss plan in place.
This is much the same concept as a stop order you might have on stocks in your portfolio.
The recap on the logic Selling cash-secured puts is a substitute for placing a limit order on a stock you a secured put option is to own. You receive a premium for selling the puts, and if the options are assigned, the premium can be applied to the purchase of the stock.
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- NOTE: This graph shows profit and loss of long stock and the short put.
Just remember, only sell puts on the number of shares you can reasonably afford to buy. And have a stop-loss plan in place, in case the stock goes completely in the tank.