The Income Generating Strategy You May Have Overlooked: A Guide to Cash Secured Puts

For women approaching retirement who have accrued savings and are looking to further diversify their income strategies, one enticing option could be cash secured puts. Especially for those who are beginners to the world of options trading, this strategy can offer an attractive way to generate income. Let’s delve into what cash secured puts are, how they work, and the potential benefits and risks.

Demystifying Cash Secured Puts

A cash secured put is an options trading strategy involving the sale of a put option contract on a stock the investor is willing to buy. By selling a put option, the investor receives a premium and undertakes the obligation to buy the underlying stock at a predetermined price (the strike price) if the stock price falls below this level. To fulfill this obligation, the investor must have enough cash in their account to purchase the stock if the option is exercised.

Mechanics of Cash Secured Puts

Let’s illustrate with an example: imagine you are considering buying shares of Company X, but you believe it is overpriced at its current rate of $100 per share. You decide to sell a put option with a strike price of $90 and receive a premium of $2 per share. If Company X’s stock falls below $90, the put option will be exercised, requiring you to buy the stock at the $90 strike price. However, considering the $2 per share premium you received for selling the put option, your actual cost basis for the stock would be $88 per share.

If the stock price remains above the $90 strike price, you retain the $2 per share premium as profit and can sell another put option in the future. If the stock price falls below the strike price, you can choose to hold the stock or sell it, potentially at a loss.

The Allure of Cash Secured Puts

Cash secured puts can offer significant benefits. Primarily, this strategy enables investors to generate income even in a stagnant or bearish market. The premium received serves as profit if the stock price stays above the strike price, and if it falls below, the investor has the chance to buy the stock at a lower cost basis.

Another notable advantage is that cash secured puts are potentially less risky than buying the underlying stock outright. By selling a put option, the investor gets paid to wait until the stock price drops to their preferred entry point.

Understanding the Risks

Despite the benefits, cash secured puts carry risks. The main one is the stock price falling significantly below the strike price, forcing the investor to purchase the stock at a higher cost than the current market price. Additionally, if the stock price continues to fall, the investor may end up holding the stock longer than desired.

Another risk is the premiums received for selling put options may not be substantial enough to offset potential losses. As such, it’s crucial to have a robust understanding of the underlying stock and market conditions before utilizing a cash secured put strategy.

To become more comfortable with the mechanics of selling puts and to watch how the trade can play out, you might want to consider paper trading the strategy with your broker, or popular trading platforms like Think or Swim or TradingView. 

Here is a great video that goes more in-depth from TD Ameritrade. https://www.youtube.com/watch?v=KE8nHwM2IXs

Conclusion

For single women approaching retirement, cash secured puts can be a strategic tool for income generation. By combining a solid understanding of the market with this effective strategy, you could potentially generate additional income, maximizing the use of your savings as you transition into retirement.

Once you own 100 shares of a stock, you can then generate income selling covered calls. Click Here to read about this great income-producing strategy for passive income in retirement.  The two strategies combined are often referred to as “The Wheel,” combined they are one of the most popular option trading strategies for beginners and those who want to take a more passive approach to managing their portfolios while maximizing on the potential for growth beyond just buy and hold tactics. 

For more insights on retirement strategies, we invite you to explore our article, “Consolidating Old 401k Rollover Accounts: Streamlining Your Retirement Savings,” which provides guidance on managing IRAs and rollover accounts from past employers.