cash secured put option

Submitted by admin on Mon, 11/08/2021 - 23:57

If an investor sells a put option of a security, meanwhile,there are enough cash set aside in the investor's account if the option is assigned. This option strategy is called cash secured put option.

This is a widely used options strategy. If the stock price is above the strike price on expiration day, investor can collect all premium generated from writing put option.

If stocks drops to or even below the strike price on expiration day, investor has two options to choose from:

1. Buy back the put option for a higher price. You are going to lose money if you do so.

2. Let the underlining security assigned. Collect all premium from writing put option.

Warren Buffett used this cash secured put option strategy a lot. When he decided to invest in KO (Coca Cola) in late 1980s, he kept selling cash secured put options of KO. He made more than 8 million USD from this strategy alone.

 

Many investor combine this cash secured put option strategy with covered call strategy to generate stable income stream. However, in order to do so, investor will need to time the market.