Cash-secured put explained: cash, premium and assignment

A cash-secured put is a paid promise to buy a stock at a price you pick. You sell a put option and keep enough cash to cover it: the strike price (the price per share you agree to pay) × 100 shares for each contract. In return you receive a premium, the cash the buyer pays you up front, which you keep whatever happens. If the stock is below the strike at expiration (sometimes earlier), you will probably be assigned: you must actually buy the 100 shares at the strike, even if they trade far lower. Best case, you keep the premium; worst case, you pay the strike for shares that end up worth much less.

In numbers: sell one $50 put for $2.00 a share, and you receive $200, set aside $5,000 and break even at $48 a share ($50 − $2.00). This guide covers stock and ETF options listed in the US, which are American style (the buyer can exercise them on any trading day until expiration) and settle in shares. Options on Canadian stocks listed on the Montréal Exchange share the same basics: 100 shares per standard contract, American style, settled in shares. The example is fictional, in US dollars, before fees and taxes. New to options? Start with the free lesson what an option really is.

How a cash-secured put works, step by step

1. Pick a stock or ETF you would be happy to own at the strike, even if it keeps falling after you buy. The Options Industry Council (OIC), the industry’s education body, is blunt about it: you must accept the strike as a long-term purchase price, however low the market goes.
2. Choose the strike and the expiration. A strike price below today’s share price is out of the money (the put would be worth nothing if exercised now): it pays a smaller premium than a strike near the share price, and is less likely to end in assignment.
3. Set aside the strike × 100 for each contract, in the option’s currency: $5,000 for one $50 put, $10,000 for two. Your broker must approve your account for options and may hold that cash as collateral; margin buying power is not the same thing.
4. Sell to open the put with a limit order, which sets the lowest premium you’ll accept. Every option has a bid and an ask (what buyers pay and what sellers want); the midpoint is not a promised fill. Record the premium you actually got.
5. Manage it until expiration: let it run, buy it back to end the obligation, or roll it. The three ways out are below.
6. At expiration, a put that ends above the strike expires worthless: you keep the premium and your cash is free again. A put that ends below the strike is normally exercised, which means assignment for you: you buy the shares at the strike.

Worked example: selling a $50 put on a $52 stock

Fictional stock ABC trades at $52. You sell one 30-day put with a $50 strike for $2.00 a share. One standard contract covers 100 shares.

Two things stand out. Above $50, your gain stops at $200 however high ABC climbs, and you never get the shares. Below $48, every dollar ABC falls costs you $100. The cash made sure you could pay; it didn’t protect you. A loss on assigned shares stays unrealized while you hold them, and their price keeps moving after expiration.

Run the numbers yourself: this example in the options calculator opens prefilled with fees at zero, or try the cash-secured put calculator with your own strike and premium. For real setups, the wheel pages for $MSFT, $KO and the $SPY ETF show live prices and sample 30-day puts. Examples, not recommendations.

What happens if you’re assigned

• You buy 100 shares per contract at the strike: $5,000 in the example, even if ABC trades at $40.
• You keep the premium. Your net cost is $48 a share ($5,000 − $200 = $4,800), what the OIC calls the effective purchase price: strike minus premium.
• It can happen before expiration. The buyer can exercise on any trading day, and the OIC notes that most professional traders exercise puts early once they are deep in the money (share price far below the strike). The clearing house assigns exercise notices to brokers at random, and your broker then picks accounts by an exchange-approved method: you don’t get a say.
• Then decide what to do with the shares: keep them, sell them, or sell a covered call on them (the second half of the wheel). If you do, check the ex-dividend date first: a covered call can be assigned early just before it.

Three ways out before expiration

• Let it run. If ABC stays above $50, the put expires worthless and the $200 is your gain.
• Buy it back. A filled buy-to-close order ends the obligation. In the example, buying back at $0.75 a share leaves ($2.00 − $0.75) × 100 = $125 before fees. A buyback can also cost more than you received, which locks in a loss. Check first that you haven’t already been assigned, and remember that an unfilled order closes nothing.
• Roll it. Buy the put back and sell a new one with a later expiration, a different strike, or both. That’s two trades: the buyback sets the first put’s result, and a net credit doesn’t erase a loss. Our guide on how to roll a cash-secured put walks through the numbers.

When a cash-secured put makes sense, and when it doesn’t

• It can fit when you already want to own the stock, would be happy to buy it at the strike, and the cash would sit idle until expiration anyway. The OIC describes it mainly as a way to buy stock at a price you choose.
• It’s a poor fit when you’d hate to own the stock after a sharp fall, need the cash before expiration, or are chasing the premium itself: a big premium usually means the market expects big price swings, often around earnings or news.
• Compared with a limit order to buy at $50, you’re paid $200 to wait, but you can’t cancel for free (you have to buy the put back), a brief dip below $50 doesn’t necessarily get you the shares, and if ABC rallies you miss the rise, which the OIC lists as the strategy’s second risk.

Common mistakes

• Treating margin as cash. A put is cash-secured only if the full strike × 100 is really there. Without it, you have an uncovered put on margin, a different position that lets you sell more than you could pay for.
• Selling more contracts than your cash covers. Each contract is 100 shares: three $50 puts mean $15,000 on assignment.
• Forgetting adjusted contracts. After a split, merger or spin-off, a contract can deliver something other than 100 shares. Check the terms before you trade.
• Counting the premium as profit on day one. It’s cash received; the result is only known when the put expires, is bought back or is assigned.

Taxes when a put is assigned or expires

In Canada, when a put you wrote is exercised, the premium is deducted from the cost of the shares you buy (Income Tax Act, s. 49(3.1)): $5,000 − $200 = $4,800, an adjusted cost base of $48 a share before commissions, in Canadian dollars on your return. If the put expires instead, writing it counts as disposing of property with a nil cost (s. 49(1)), so the premium is your gain for the year you sold it. If you reported that premium and the put is exercised in a later year, s. 49(4) lets you amend the earlier return. This applies to non-registered accounts.

In the US, IRS Publication 550 also reduces your basis in the shares by the put premium, and your holding period starts when you buy the shares, not when you sold the put. If the put expires, the premium is a short-term capital gain. Not tax advice; check with a tax professional.

Keep a record

Log the put sale, any buyback and any assignment as separate events: premium in, buyback cost out, shares bought at the strike. The free wheel spreadsheet keeps one row per trade, with a wheel summary sheet.

FAQ: What is a cash-secured put in simple terms?

It’s selling a put option while keeping the cash to buy the shares if you have to. You’re paid a premium now for promising to buy 100 shares per contract at the strike price until expiration. If the stock stays above the strike, you keep the premium; if it falls below, you’ll probably buy the shares.

FAQ: How much cash do I need to sell a cash-secured put?

The strike price × 100 for each contract: $5,000 for one $50 put, $20,000 for one $200 put. That’s the full amount you would pay on assignment. Brokers set their own collateral rules, so check exactly what yours holds back.

FAQ: What happens if my cash-secured put is assigned?

You buy 100 shares per contract at the strike, paid with the cash you set aside. You keep the premium, so your net cost is the strike minus the premium: $48 a share in the example. Assignment comes at expiration or, less often, earlier, and your broker tells you after it happens.

FAQ: Can you lose money on a cash-secured put?

Yes. If the stock falls below the break-even (strike minus premium), you lose money once assigned, and the loss can approach the whole amount set aside: $4,800 on $5,000 in the example if the stock goes to zero. Buying the put back for more than you received also locks in a loss.

FAQ: Can I sell a cash-secured put in a TFSA or RRSP?

Writing an option is not, in itself, subject to the qualified-investment rules, says the Canada Revenue Agency. But the CRA also says writing a put, alone or combined with other positions, may lead it to consider the plan to be carrying on a business, and a TFSA or RRSP is generally taxable on business income; it depends on all the facts. Covered calls on shares the plan already owns are not, by themselves, a business. Your broker also decides which option strategies it allows in a registered account. Source: CRA folio S3-F10-C1, ¶1.40 and 1.41.