Selling Cash Covered Puts

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Hello
Today I would like to talk about the trading strategy called selling cash covered puts.

What is “Selling cash covered puts”?

This means you sell a put or one contract of puts on an underlying and you don’t buy another put to cover your downside like you would in a spread, but you cover these puts with cash. Which means if the person you sell the puts to excercises them and sells you the underlying you have enough cash to buy and satisfy your obligation.

I like to use this trade when I want to own a stock, but not at today’s price, but a lower price. So I sell puts at a price I am willing to pay for the stock and I make sure I have enough cash to buy it at this price. Then I collect the premium and wait.

Now three things can happen at the end of the expiration period.

1. If the stock goes up, my option contracts expire worthless and I keep the premium or cash I collected selling the option.
2. The stock stays the same or just above the strike price of my option, and once again, my option contracts expire worthless and I keep the premium or cash I collected selling the option.
3. The stock price falls below my option strike price, and the buyer excercises the option and sells me the stock at its new low price!

This trade method is great because I win no matter what!

Let’s look at a numerical example to see this option trade again.
Example:
Apple stock is trading at $100.00
I don’t want to buy it at $100.00, but I am willing to buy it at $95 dollars.
I have 95.00 x 100 = $9500.00 in cash in my account.
I sell a Put contract on Apple, which expires in 30 days, with a strike price of $95.00.
This strike price is $5.00 below market, so I get $5.00 x 100 shares for one contract = $500.00 is the premium I am paid for selling one contract.
Now one of three things happens.

Scenario 1
The stock price continues to rise and my buyer doesn’t exercise his option, so it expires and I keep the premium.
My account balance rises from $9500.00 to $10,000. I win!

Scenario 2
The stock price stays the same or drops a little, but not below my strike price, so the buyer doesn’t exercise his option. It expires and I keep $500.00. I win.

Scenario 3
The stock price falls to $94.00 and the buyer exercises his option to sell the stock to me at the strike price of $95.00 per share so I pay him $95,000, I get 100 shares of Apple at the price I wanted to buy it, and I keep the $500.00 the buyer paid me for the option. So not only did I get the stock at a price I wanted, but I also got an extra $500.00.
I win again!

I think this strategy is great and I love this strategy when I want to own a stock which is also having daily ups and downs between a trading range. I can sell these puts at the bottom of the range or it’s lower resistance and then wait.
I hope you understand the play. Ask questions in the comments if you don’t.

Happy Trading!
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