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What is cash Secured Put Option?

 What is Cash secured put (CSP) option ? 

A cash-secured put option is a type of options strategy where an investor sells a put option and simultaneously sets aside enough cash to buy the underlying asset (usually stocks) at the strike price if the option is exercised.

How Does It Work?

  1. Sell a Put Option: You sell a put option with a specific strike price and expiration date.

    • For example, let’s say you sell a put option on Stock Coca-cola with a strike price of $68 expiring in 30 days.

    • For this, you receive a premium (let's say $0.6per share).

  2. Set Aside Cash: You must have enough cash to buy the stock at the strike price in case the option is exercised.

    • In this case, since the strike price is $68 and each option contract represents 100 shares, you need to set aside $6,800 ($68× 100 shares) in your account.

  3. Possible Outcomes:

    • Stock Price Stays Above Strike Price: If the stock price stays above $68 by the expiration date, the buyer of the put will not exercise the option. You keep the premium you received ($3 per share), and the option expires worthless.

      • You make a profit of $60 (since $0.6 × 100 shares = $60).

    • Stock Price Falls Below Strike Price: If the stock price falls below $68, the buyer of the put option may exercise the option, and you’ll be obligated to buy 100 shares of Stock KO at the strike price of $68.

      • For example, if the stock drops to $66, you still have to buy it at $68. Your total outlay is $6800, but your paper loss is $1,000 ($68 - $66 = $2 per share loss).

      • However, you still keep the premium you received ($60), which reduces your effective purchase price

Why should you do CSP? 
  • Buy Stocks at a Discount
  • Generate Monthly Income

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