Cash Secured Puts (also known as “naked” puts) are ways to buy a stock at the price you want and get paid for the wait.
Let’s say you think ABC stock, which is currently at $54 a share would be a steal at $45 and you would want to own it. PLEASE NOTE: only do this strategy if you WANT to own the stock at that price.
What do you do? Wait until the stock has a sell off to $45? What if that never happens? Do you just wait forever?
NO !
What you will do is sell out a cash secured put.
Here is how it works:
ABC is currently at $54 a share. You would like to buy it if it falls to $45. But instead of just waiting around for that day you want your money to work for you. But how can it work for you? This is where cash secured puts come in.
What you would do in this case is SELL an October 45 put for $.65
This would bring you $65 per contract (100 shares per contract) while you wait. That may not sound like a lot, and in reality it isn’t, UNTIL you realize that in most brokerages they are only holding $600 in your account (the $600 hold is the cash secured part of the trade). That is over a 10% return on your investment even if the stock NEVER comes down to $45 a share.
If the stock does come down and closes below $45 a share then you will have your wish in getting the stock for $45 a share and also have a “bonus” or “cushion” of $.65 per share as well (you really only pay $44.35 per share, $45 minus the $.65 you sold the option for).
This is a very popular strategy among moderate or advanced traders as it provides us with a method for making “easy” money while waiting for a stock to pull back.
