How to Sell a Cash-Secured Put

Selling options means keeping a close eye on the stock market.

Selling a put means you are giving someone the option to sell you shares of a particular stock at a particular price -- called the strike price -- anytime between the initiation of the contract and its expiration. You collect a premium for this because you are in effect guaranteeing the price you will pay for those shares, even if the price declines, for whoever has bought your contract. Cash-secured puts, also called naked puts, are those contracts written when you have enough cash on hand in your brokerage account to cover the purchase of those shares.

Difficulty:

Moderate

Instructions

Things You'll Need

• A brokerage account approved for options trading (specifically selling cash secured puts
• Enough cash or purchasing power to cover the purchase of the stock

1. Make sure that your brokerage account is approved for selling puts. This typically is a second level of options trading after the ability to sell covered calls.

2. Identify a stock you would like to own. Be sure you are really willing to invest in the stock in the event that the price declines and you are obligated to purchase the stock.

3. Review the bid/ask option prices available on the market for the stock you chose. You can do this by going to the "Option Chain" screen on your brokerage's website.

4. Identify the strike price at which you would like to sell your put and the length of time for the option contract. The higher the strike price, the greater premium you will receive but also the more likely it is that you will have to purchase the stock. Also, the longer the time before option expiration, the more time there is for the stock to move up in price but also down in price, causing you to purchase the stock.

5. Enter your order as is customary for your brokerage account, and collect the premium when the contract sells.

6. Follow the price movement of the stock. If you realize that you made a mistake, it is possible to purchase the contract back. This can result in a profit or a loss, depending upon the premium received and the repurchase price.

Tips & Warnings

• Pay close attention to the stock price because you can be forced to purchase the stock at any time.

• Upon the option expiration, you will either own the stock or you will have collected the premium with the option expiring worthless.

• Avoid the most volatile stocks when selling puts. This can be a way to lose a lot of money in a bear market or stock market crash.

References

• The Options Industry Council: Options Strategies - Cash Secured Put