Option Strategies

Cash-Secured Put

This strategy is widely known as a cash-secured put (sometimes shortened to “secured put”). You sell a put while holding enough cash to buy the shares if you are assigned.

In this historical example (Bank of America around the 2009 period), you don't own any shares, but you wouldn't mind owning BAC if it went down a little in price. You're fairly sure that BAC has good long term potential so you want to take advantage while its down. Currently it is trading around $9.07/share. You think that if it drops any lower you want to buy. So you submit a "Sell to open" order for 10 Put options at the $9 strike price. Now two things will happen.

Each option costs $1.18. So you will receive in cash the total premium. I.e., $1,180.
Your brokerage firm will ensure that you have at least $9,000 in cash or cash equivalents. Why? Because by selling Put options you've given someone the right to sell you 1000 shares of BAC at $9/share. Your broker wants to make sure you can live up to your obligation. That's where the name "cash-secured" comes into play.