How a cash-secured put works
Selling a put obliges you to buy 100 shares per contract at the strike price if the buyer exercises. A cash-secured put is one where you hold the full purchase price in cash, strike × 100 per contract, so you can always meet that obligation without borrowing. In return you collect the premium up front, and keep it whatever happens.
At expiry there are two outcomes. If the share price is above the strike, the put expires worthless and the premium is your profit. If it is below the strike, you are assigned: you buy the shares at the strike, and the premium lowers what they effectively cost you.
breakeven = put strike − premium per share
return on cash = premium ÷ (strike × 100)
A worked example
With the figures loaded above, the shares trade at $100 and you sell one 30-day put at a $95 strike for $1.80. You set aside $9,500 and collect $180.
- Breakeven is $95 − $1.80 = $93.20, 6.8% below the current price. Above that at expiry, you do not lose money.
- Return on cash is $180 ÷ $9,500 = 1.89% in 30 days.
- Annualised, that is 23.1% simple, or 25.7% if the same return could be compounded every month. That is a big if: it assumes twelve trades in a row with the same premium and no losses.
The maximum profit is the $180. The maximum loss, if the shares went to zero, is $9,320: the $9,500 paid for the shares less the premium. That asymmetry is the trade you are making. It is the same risk shape as a covered call, and nearly the same as owning the shares outright below the strike.
The wheel: put, assignment, call
The wheel strategy repeats the cycle. Sell cash-secured puts until one is assigned. Then, holding the shares, sell covered calls against them until they are called away. Then start selling puts again.
Continuing the example: the put is assigned at $95. You sell a 30-day call at a $100 strike for $1.50. Your cost basis is now $95 − $1.80 − $1.50 = $91.70 a share. If the shares are called away at $100, the cycle makes $8.30 a share, $830 on the $9,500 committed: 8.74% over 60 days, or about 53% simple annualised.
That is the best case, and it is the one wheel enthusiasts quote. The rest of the time the shares fall after assignment and sit below your cost basis, and the calls you can sell above that basis pay very little. The wheel then becomes a long stock position you are waiting out. Never sell a call below your cost basis unless you are content to lock in a loss if it is exercised; the calculator warns when you do.
Choosing strikes and expiries
- Only sell puts on shares you want to own at that price. Assignment is not a failure of the strategy; it is half of it. If you would not buy the shares at $93.20, the premium is not worth it.
- Lower strikes are safer and pay less. Moving the strike further below the price widens the cushion and shrinks the yield. The expected move calculator shows how far the options market expects the shares to travel by expiry.
- Premium is high for a reason. Unusually rich put premium usually means the market expects a large move, often around earnings. Check the calendar before selling.
- Compare against the cash rate. The cash securing the put can usually earn interest at the same time in a money-market fund or Treasury bills, depending on your broker. The premium is the extra return for taking on the share-price risk.
To see the full payoff of the put, or of a covered call, at any price and date before expiry, use the options profit calculator.