LEARN HOME / LESSON 1
What you sell, what you owe
A cash-secured put gives someone else the right to sell you 100 shares at a fixed price. You receive a premium for taking that obligation.
The illustration
ILLUSTRATION A share trades at $100. You sell one 30-day put with a $70 strike for $2 per share.
| Item | Dollar result | What it means |
|---|---|---|
| One standard contract | 100 shares | Options normally cover 100 shares. |
| Premium received | $200 | $2 × 100. This is the most the option itself can make before costs. |
| Cash to reserve | $7,000 | $70 × 100. Keep this cash available if assignment happens. |
| Break-even before costs | $68 | $70 strike minus the $2 premium. |
Three endings
1. The share stays above $70
The put may fall in value. If you later buy it back for less than $2, you keep the difference before fees. The maximum option profit remains $200 before fees.
2. The share falls to $69
The premium gave you a $2 cushion, so $68 is the break-even before costs. That cushion can disappear quickly. You still need a decision: close the option, keep watching it, or prepare for assignment.
3. The share falls to $40
If assigned, you buy 100 shares at $70 when the market values them at $40. The $200 premium offsets only a small part of the $3,000 difference. The rough loss before costs is $2,800.
Try it
A $50 share, a $35 put, and a $1.20 premium. How much cash must you reserve?
$3,500. One contract means 100 shares. Reserve $35 × 100. The premium is $120. The break-even before costs is $33.80.
Checklist
- Can I state the strike, the number of shares, the premium, and the cash reserve?
- Can I calculate the break-even before costs?
- Can I describe what happens if the share price collapses?
- Do I have enough cash for assignment without borrowing or selling another position under pressure?