![]() ![]() Put Option Benefit #2 = You Can Reinvest Right AwayĬash secured puts allow for immediate reinvestment. Sometimes the option premiums generated by this strategy can actually dwarf the dividend income generated by the stock itself. Depending on the security and the price at which you’re willing to buy, this cash flow can be significant. When you sell cash secured puts, you get paid the option premium upfront. We will dive into these – beginning with the benefits – before concluding this guide with several examples.īenefits of The Cash Secured Put Income Generation Strategy Put Option Benefit #1 = You Get Paid However, keep in mind that the point of this strategy is 1) to generate upfront cash flow and 2) to potentially purchase securities you would be happy to own anyway.Īs with any investment strategy, the cash secured put income generation strategy has pros and cons. Here, the underlying stock price is on the horizontal axis and the strategy’s payoff profile is on the vertical axis.Īs you can see, the upside of the strategy is equal to the option premium received, less any applicable commissions.Īs the price of the underlying stock declines past the strike price of the option, the strategy becomes less profitable and, eventually, the investor participating in the cash secured put option strategy loses money. This allows you to receive the option premium upfront in exchange for the obligation (if the option is exercised) to purchase the security at a lower price point.Īn image is helpful in understanding the payoff profile of a cash secured put option strategy: ![]() In a cash secured put option strategy, you sell a put option for a security that you would like to purchase, but at a lower price than it is currently trading. If the contract allows the option holder to sell the security, it is a put option.Įach stock option corresponds to 100 shares of the associated security, which is called the “underlying.” This is a very important concept to understand, and makes the cash secured put strategy unsuitable for investors that have only small amounts of capital to invest. If the contract allows the option holder to buy the security, it is a call option. “A stock option is a contract between two parties in which the stock option buyer purchases the right (but not the obligation) to buy/sell 100 shares of an underlying stock at a predetermined price (called the strike price) from/to the option seller within a fixed period of time.” Here’s the formal definition of a stock option. To understand what a cash secured put option strategy is, you need to have a fundamental understanding of stock options. What Is The Cash Secured Put Income Generation Strategy? Video: How To Boost Your Dividend Income Using Cash Secured Putsįor investors who prefer to learn about new strategies through videos, we have created the following video companion to this guide on the cash secured put income generation strategy:
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