What is a cash-secured put and why do income investors prefer it over buying stock directly?

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AcadiFi · Accepted Answer

A cash-secured put means you sell a put option and set aside enough cash to buy the shares if assigned. Suppose Cascade Semiconductor trades at $58 and you sell the $55 put expiring in 30 days for $1.10. You set aside $5,500 in cash. Two outcomes: 1. Cascade stays above $55: the put expires worthless. You keep $110, representing a 2.0% return on capital in 30 days (~24% annualized). 2. Cascade drops below $55: you are assigned and must buy 100 shares at $55. Effective cost is $55 - $1.10 = $53.90, a 7% discount to today's price. The advantage over a limit order is that you get paid to wait. The trade-off is opportunity cost: if Cascade rockets to $70, you earned only the premium while a direct buyer captured full upside. ```mermaid flowchart LR A[Sell $55 put
collect $1.10] --> B{Price at expiry} B -->|above $55| C[Keep premium
2% return] B -->|below $55| D[Buy at $53.90
effective cost] ``` For CFA Level II, remember that a cash-secured put has identical payoff to a covered call at the same strike — both are short volatility, positive theta, negative gamma positions. Use them when implied volatility is elevated relative to your forecast of realized volatility.

What is a cash-secured put and why do income investors prefer it over buying stock directly?

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