- Zero Days to Expiration (0DTE) Options and How do They Work?
- What is an Outright Option?
- What is a basket option?
- What Are Mountain Range Options?
- What are Futures Equivalent?
- What are STIR Futures & Options: Definition, Price Quotation & Example
- Cost-of-Carry: Definition, Carry Model & Example
- What is Managed Futures Account: Definition, Advantages & Example
- What is an Outright Futures Position: Definition, Advantages, & Example
- What is a Futures Commission Merchant - Role, Obligations & Responsibilities
- Gold Futures
- What is the Fed Fund?
- What is Futures Spread
- What are shout options?
- What is a Short combination?
- What are currency derivatives?
- What are Long-dated Options?
- What are Swap Derivatives?
- What Is a Multi-Leg Options Order?
- Copper Futures
- Receiver Swaptions
- Tips for Getting Into Futures Trading
- What are market indicators?
- What is Margin Money?
- What is Short Covering?
- All About Commodity Options
- Futures and Options
- What is a Diagonal Spread and How does it work
- What is Credit Spread Strategies
- What is Box Spread trading Strategy
- What is Eurex? Understand Here!
- How are options settled?
- What are Naked Options?
- What is Option Premium
- What is Long Combo Option Trading Strategy
- What is a Cash Settlement?
- What are Oil futures
- What are Forex Options?
- What are Exchange Traded Derivatives?
- What are Equity Derivatives?
- What is Quadruple Witching
- What is Zero-Cost Collar Strategy
- What are Weekly Options?
- Synthetic Options Spread
- What are Commodity Options?
- What is Hedging with Futures?
- What is a Protective Put?
- What is call writing?
- What are Bermuda Options
- Put Writing Strategies
- What Is Call Option?
- What are Collateralized Debt Obligations?
- What is Derivative Trading?
- Options Trading Strategies: Vertical Spreads and Synthetic option spreads
- What is a fiduciary call? Understand here
- Short Put Ladder Options Strategy
- Long Call Condor Option Strategy
- Long Call Ladder Options Strategy
- Short Call Condor Options Strategy
- Short Call Ladder Options Strategy
- What are cash secured puts?
- How to Use LEAPS for Covered Call writing
- How to Calculate F&O Turnover
- Why futures prices converge upon spot prices
- What is E-mini futures
- Seagull Options
- What is Put Ratio Spread
- What is a hedging strategy?
- What is a bond option?
- What are bond futures?
- What is a derivative?
- What are commodity futures?
- Options arbitrage strategies
- What is a call ratio backspread option strategy
- Difference between warrants and calls
- What is a Short Put Butterfly option strategy
- What are over the counter (OTC) options
- How are futures prices determined
- Top 10 Mistakes when trading cheap options and how to avoid them
- How to be a successful options trader?
- What is cross currency swap
- What is expiration time in options trading?
- What is options trading?
- What are Index Futures?
- What is LTP in the Share Market?
- What is a Strike Price?
- What is Spot Price?
- What is an Underlying Asset?
- What is a Forward Contract?
- What is futures trading?
- Benefits of trading in futures
- Show all articles
What are cash secured puts?
The cash secured put is an option selling strategy deployed with the aim to buy the stock below the current market price. Here an investor keeps sufficient funds to buy a stock at the predetermined strike price while simultaneously selling the put option of that strike price.
However, the one big risk involved in this strategy is that if the stock prices zoom significantly higher, investors may have to buy the stock at higher than expected prices.
Example of cash secured put
Let us understand this with the help of a cash secured put example. Mr. Malik is a trader. He wants to buy 250 shares of Reliance Industries Ltd (RIL) at ₹2,400 when it is currently trading at ₹2,450. He has two options:
- Option 1: Wait for the price to dip.
- Option 2: Deploy cash secured put strategy.
Mr. Malik decided to go with option 2. He sells a put option of RIL of the strike price of ₹2,400 for a premium of ₹20. The lot size of the RIL options contract is 250.
Total premium received = Premium x lot size = ₹20 x 250 = ₹5,000.
Contract value = Strike price x lot size = ₹2400 x 250 = ₹6,00,000.
As the contract value of this option is ₹6 lakhs, Mr. Malik will keep this amount in his account to buy RIL shares. Since the investor has the contract value available in cash against the put option sold, this strategy is known as cash secured put.
Let's understand what happens next with the help of the following scenarios from the put seller's perspective:
Scenario 1: At expiry, RIL is trading at ₹2,300.
In this case, Mr. Malik incurred a loss on his put option as the shares of RIL went below the strike price of 2,400.
Loss = (strike price - spot price - premium received) * lot size = (2,400 - 2,300 - 20) * 250 = ₹20,000.
Here, the buyer has the opportunity to buy the shares in the cash market at a cheaper rate than expected.
Scenario 2: At expiry, RIL is trading at ₹2,380.
₹2,380 mark is the break-even point in this scenario, which is calculated by subtracting the strike price from the premium paid.
Break-even point = strike price - premium = ₹2,400 – ₹20 = ₹2,380. Profit = 0.
This point is the same for the buyer and seller. So, Mr. Malik’s profit is also zero.
Scenario 3: At expiry, RIL is trading at ₹2,400.
As the spot price is equal to the strike price, the seller can not only pocket the premium, but also buy the stock at that price on expiry.
Profit= Total premium received = Premium x lot size = ₹20 x 250 = ₹5,000.
Mr. Malik gets to buy the shares at ₹2,400 which he wanted. In fact, the profit on put options effectively further lowered his buying price to ₹2,380.
Scenario 2 and 3 are the ideal cases for investors selling cash secured puts.
Scenario 4: At expiry, RIL is trading at ₹2,500
In this case, the spot price moved ₹100 higher than the strike price. As the spot price has ended up above the strike price, the seller keeps the whole premium amount.
Profit= Total premium received = Premium x lot size = ₹20 x 250 = ₹5,000.
Here the investor has to buy shares at much higher prices. The profits earned through selling put options cover only a part of the increase in share price.
Payoff Schedule for the put option sold
|RIL @ Expiry||
Net Payoff (Rs)
Remember: Cash secured put margin requirement is the same as that of a normal put. However the contract value being available in the investor's account is what makes it a cash secured put.
Selling cash secured puts and covered calls
These are two different strategies. In selling cash secured puts, an investor has to have funds equal to the contract value in the investor's account to buy a stock at the predetermined strike price while simultaneously selling the put option of that strike price. While a covered call strategy refers to selling a call option of a security that the writer already has a long position on in the cash market or in futures.
So to summarise:
- If the trader selects the correct strike price, he will not only receive the premium but also be able to buy the shares at expiry or he may continue selling cash secured puts for income.
- Selling weekly cash secured puts is not an effective option in India as weekly options are available only for Nifty 50 and Bank Nifty and not stocks. And this strategy is primarily for lowering the cost of purchase of stocks.
- Premium earned helps offset the cost of purchasing the shares in the cash market.
- This strategy cannot be adopted if an investor has to take cash positions significantly smaller than the option contract value.
- This strategy can only be used for stocks on which options are traded.
- If the share price remains high, an investor may end up buying them at a much higher price than anticipated.