Earn Yield On Your Cash By Expressing Relatively Bullish Views
Cash-secured puts are another common options strategy in which a trader sells an out-of-the-money put option on an asset. In this way, the trader is expressing a relatively bullish market view on the underlying asset and expects it to be above the selected strike price at expiry.
There are now two possible scenarios: the asset's price is either below or above the strike price of the sold put options at expiry.
If the price of the asset remains above the strike price at expiry, the options are worthless and the user has earned the full premium as their return for the period.
However, if the price of the asset is below the strike price at expiry then the options will be exercised by their owner. Exercising the put options results in the owner selling the asset at the higher strike price instead of the current market price. As a result, the trader who sold the options has effectively purchased the asset at a higher price than the current market price, resulting in a potential loss in dollar terms--depending on the magnitude of price appreciation and option premium earned.
The optimal outcome when running this strategy is for the price of the underlying asset to remain above the selected strike price at expiry. This way, the trader benefits from the full option premium earned from selling the puts and avoids any impact on their initial collateral.
A cash-secured put strategy is a relatively bullish strategy. It is perfect for people who are looking to earn yield on their cash and think an asset will trade above the selected strike price. Note, the asset can drop below the market price when the user selected their strike with the trader still earning the full premium without being exercised as long as the asset's price remains above the strike price.
The risk profile of a cash-secured put is dependent on the user's preferences and aggressiveness of the strike price selected. The closer the selected strike price is to the current price of the asset, the more likely it is to expire in the money and thus the higher the premium received. Therefore, it comes down to the methodology for strike selection which is a function of the user's preference to purchase the asset at the strike price in return for yield on their cash. There is no right answer here and each trader will have their own market views and preferences.