Instead of waiting for a stock they want to buy to fall, the trader sells a put on it and collects the premium while waiting, holding enough cash to buy. If the stock falls to the strike price, they buy it at a price below where it traded on the day of the sale, minus what they collected.
| MSFT now | 415$ |
| You sell a put with a $400 strike that expires in 35 days | Premium: $3.20 = $320 up front |
| Cash required as collateral | 40,000$ (400×100) |
| Return on the cash set aside | 0.8% in 35 days (about 8.3% annualized if repeated) |
| Your effective cost if you buy | 400−3.20 = 396.80$ |
Three outcomes at expiration
- The stock stayed above $400: the contract expires worthless, you keep $320, and the cash set aside is freed.
- The stock finished just below $400: you buy 100 shares at $400, and your effective cost is $396.80 per share after the premium.
- The stock fell hard to, say, $350: you pay $400 for something worth $350, and the unrealized loss is (396.80 − 350) × 100 = $4,680.
It suits someone who wants to buy the stock at a price below the current one and collect premium while waiting. The risk is that if the stock falls far below $400, the seller buys it at $400 when it is worth much less, and the premium covers only $3.20 of the drop.
Why "cash-secured"?
Because the seller keeps the full price of the shares ($40,000 in the example) in the account for the life of the contract, so there is no need to borrow if assigned. This is what separates it from selling a "naked" put, which relies on the broker's margin.
And this is where the Wheel begins
If the stock is assigned to you, what the previous chapter covered begins: selling a covered call on the shares you bought. You collect premium in both stages, and the risk in both cases is the stock falling.
Common mistakes
- Selling on a stock you would not accept owning because its premium is high. A high premium means the market expects a big move.
- Setting aside more cash than the account can handle across several contracts, so a general drop turns into assignment on all of them at once.
Summary
A cash-secured put is a way to buy a stock you want at a lower price and collect premium while you wait. The cash for the purchase stays set aside in your account for the whole term. The real risk is a sharp drop below the strike price, so choose a stock you would accept owning before you choose the contract.
