Contents

Cash Secured PUT

Cash Secured PUT is a bullish to neutral strategy. You use this strategy when you have an intention to take delivery of the stock when the price falls. You need to keep aside some cash to buy the stock if price falls.

Sell PUT options of stocks which you expect to increase in the long term. ALso, sell PUTs only if you have an intention of buying the stock and the cash to buy the stock when the price falls.

Trade Set-Up

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Cash Secured PUT

short put-Finvezto

Entry Checklist

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Market Outlook
  • Long Term Bullish Outlook
  • Do not sell PUT when the market is trending downwards
  • Sell only when price is moving up after bouncing from a support zone
  • Volatility
  • Implied Volatility or India VIX should be high and falling when you sell the PUT Option
  • Open Interest
  • Heavy PUT Buildup around support zone
  • PUTs sold should be equal to or more than the CALLs sold
  • Strike Price
  • Sell Out-of-the-money (OTM) PUT options of the current month or current week
  • Choose shorter timeframes as time decay will be in favour of sellers
  • Positional or Intraday?
  • Sell current month options if you are planning to hold overnight
  • Sell OTM PUT options intraday depending on the OI build up for the day
  • Risk Profile

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    Risk [Loss]
  • Maximum Risk is unlimited as the stock price might fall to zero. But, you are going to sell PUTs of blue chip companies which have good track record. So, there is less chance for them to fall suddenly. Even if it falls, you can buy them at a cheaper price with cash in hand.
  • Reward [Profit]
  • Maximum profit is limited to the premium received from the PUT option
  • Break Even Point
  • Strike Price of the PUT minus the Premium Received
  • Options Greeks Impact

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    Time Decay Impact [Theta]
  • Time decay will erode premium and reduce the value of the PUT option
  • Time decay is helpful for this position
  • Volatility impact [Vega]
  • If volatility reduces after you sell the PUTs, then you will benefit
  • Price Impact [Delta]
  • As long as delta is between 0 to -0.5, you can hold on to the position.
  • If delta goes into the zone of -0.5 to -1, you will incur significant losses. Be ready to buy the stock using cash.
  • Trade Management & Exit

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    Stop Loss
  • You will buy the stock using cash if the price falls. Stop Loss not applicable.
  • Exit Conditions
  • Buy the stock when the price falls using cash in hand
  • A Word of Caution

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    • Do not over-leverage by selling more PUT options than the cash you have in hand. Look at the cash needed to buy 1 lot worth of shares if the price falls. 
    • This strategy needs to be used when you have a long term bullish view on a stock. Pick stocks of blue chip companies and large cap companies only.
    • PUT options of large cap companies are liquid. Hence, it will be easier to liquidate the position and buy the stock in cash.