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Key takeaways:
Bonus tip:
Do you know? High Tide Incorporation offers a good option for the income investors using the cash secured put strategy as the company has low valuation.
Want to earn income while you are waiting to buy stock at a lower price? Use the cash secured put strategy as you can sell the put option and still have an amount with you to buy the stocks.
Imagine that someone is selling their house for ₹50,00,000 and you told the owner that you will buy the house when the price drops to ₹45,00,000. For making this commitment, you give ₹1,00,000 to the owner as an amount for booking. There can be 2 situations that the price never drops below ₹45,00,000 or it will fall below ₹45,00,000. You decided to buy the house in the second situation and now the value is ₹44,00,000 since you already have given ₹1,00,000. The cash secured put works in the same way in regards to the stock market.
For example, Mr. Oberoi wants to buy 250 shares of the Reliance Industries Limited (RIL) at ₹2400 but the current price is ₹2450. Now, he has two options:
Mr Oberoi used the second option to use the cash secured put strategy. He sells a put option of RIL of the strike price of ₹2,400 for a premium of ₹20. The lot size of the Reliance Industries Limited (RIL) options contract is 250.
Total premium received = ₹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 ₹6,00,000, Mr. Oberoi will keep this amount in his account to buy RIL shares.
The cash secured put is a strategy which is used with an aim to buy the stocks below the current market price. In this strategy, the investors keep an amount with himself to buy stock at the predetermined strike price and sell the put option of that strike price.
In case you are a long term investor and you are thinking of selling stocks for instant gains, then selling a cash secured put is not a good option. It is not the same as buying stocks with a lower price.
For example, I am an investor and I want to buy shares of High Tide Inc. and the current price is ₹200. I sold the put option with a strike price of ₹180 and got a premium of ₹8 per share. 2 different situation arising are:
I will buy the stock in the second situation when the price falls below ₹180. Now, the effective buying price is ₹172 after reducing the premium of ₹8.
In other words, a cash secured put helps you to earn income from premium options while you can also buy the stock at a lower price. You can also use the cash secured put calculator to know your profits and loss over a period of time.
Refer the below table to know the difference between the covered call and cash secured put:
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These are some differences between the covered call and cash secured put.
Refer the below table to know the benefits of cash secured put:
Your maximum risk associated with the cash secured put is clear unlike other strategies. These are some of the benefits of a cash secured put strategy.
Overall, the cash secured put is a strategy which is used with an aim to buy the stocks below the current market price. In case you are a long term investor and you are thinking of selling stocks for instant gains, then selling a cash secured put is not a good option. It is not the same as buying stocks with a lower price.
What is the benefit of cash secured put?
One of the main advantages of cash secured puts is that by selling weekly cash secured puts, you get premiums regularly.
What is a cash secured put?
A cash secured put is a strategy which is used with an aim to buy the stocks below the current market price.
What is the biggest risk of a cash secured put strategy?
The biggest risk associated with a cash secured put strategy is that in case the stock price reduces, you are still required to buy at the fixed price.
Explain why cash secured put are a bad idea?
In case the stock price reduces, you are still required to buy at the fixed price.
What is the main difference between covered calls and cash secured put?
The covered calls hold assets and sell calls whereas cash secured put hold cash and sells puts on assets.
