Options: Next Steps· Lesson 5 of 6· 6 min

Cash-Secured Puts: Buying Stock at a Discount

Set aside the cash to buy the stock, then sell a put and collect the premium up front. If the price doesn't drop, you keep the money; if it does, you buy a stock you wanted anyway at a cost of strike − premium.

Risk warning: forex, CFDs, options, futures and crypto assets usually involve leverage or high volatility, and you can lose more than you put in. This lesson only teaches the concepts; all numbers are for illustration and are not investment advice.

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Text version · Options: Next Steps, lesson 5: “Cash-Secured Puts: Buying Stock at a Discount”

Place a “discount buy order” and get paid up front

Want to buy a $100 stock at $95? Sell a $95-strike Put and collect a premium. If it doesn't fall to $95, you keep the money for free; if it breaks below, you buy at $95. This is called a cash-secured put.

Lock up the cash first

“Cash-secured” means setting aside “strike × 100” in cash in your account, so that if you're assigned you can definitely afford it and won't face a margin call.

A lower real purchase price

When assigned, you buy at the strike, but you already collected the premium, so actual cost = strike − premium. The catch: if the stock surges, you didn't buy a single share and only earned that little premium.

Key takeaways

Cash-secured put = sell a put + set aside strike × 100 in cash, so you can always afford the shares if assigned.
Not assigned: you keep the premium. Assigned: your actual cost = strike − premium.
The maximum gain is just the premium. If the stock crashes, you still have to buy at the strike and take the loss.
Use it only on stocks you'd happily buy at that price anyway.

Try it yourself

You can do these exercises in this lesson's interactive simulation:

Default: sell the $95 Put. How much cash gets locked up? How much premium do you collect? What's the “Return (on cash locked up)”?
Click “Small drop to $93”: you're assigned and buy at $95, so what's your actual cost? What's the short Put's P&L per share, and what about someone who buys the stock now?
Click “Plunge to $80”: how much does the short Put lose per share? How much less is that than buying at $100 at the start?
Drag the strike to $100 (at the money): how high does the premium go? The chance of assignment is higher too. That's the price of more income.

Quiz and explanations

1. You sell 1 put with a $95 strike. How much cash do you need to set aside?: Answer: $9,500.$95 × 100 shares = $9,500, used to buy 100 shares if you're assigned.
2. You sell a put with a $95 strike for a $1.35 premium. If assigned, what's your actual cost per share?: Answer: $93.65.You buy at $95 but already collected $1.35, so your actual cost is $95 − $1.35 = $93.65.
3. Same trade. At expiration the stock is $80. What's your P&L per share?: Answer: −$13.65.Buying an $80 stock for $95 loses $15; add the $1.35 premium for a net loss of $13.65. Buying outright at $100 would have lost $20.

Terms in this lesson

assignment (Assignment): When a buyer exercises, the exchange randomly picks a seller to deliver: a call seller must hand over shares, a put seller must buy them.
cash-secured put (Cash-Secured Put): Selling a put while setting aside strike × 100 in cash; if not assigned you keep the premium, and if assigned you buy the stock at a cost of strike − premium.
margin (Margin): The deposit set aside when you open a position = position value ÷ leverage.
premium (Premium): The price of an option, paid by the buyer to the seller; it's the most the buyer can lose.
strike price (Strike): The price written into an option contract at which you can buy or sell.