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Essential Option Strategies by J. Kinahan

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Chapter 11Cash-Secured Puts

Long puts and protective puts were discussed in Chapter 7. Remember that a put option increases in value as the price of the underlying moves lower. Therefore, being long a put is typically a bearish strategy that is initiated when the investor expects the price of the underlying security to move lower. The protective put is a combination of being long the underlying security and long puts. It is a strategy that is often used to protect (or hedge) an existing position in the underlying, because the long puts will increase in value and offset potential losses if the underlying instrument decreases in value.

This chapter revisits put options but focuses on selling (or writing) rather than buying. If a put buyer is bearish on the underlying, it stands to reason that a put seller might have a bullish view. In fact, the cash-secured put is a strategy that an options trader typically initiates on an underlying security that she already wants to own. Ultimately, the put writer is expressing a willingness to buy (or have put to her) the underlying security at a set strike price through a fixed expiration period.

The term cash-secured refers to the fact that the funds to buy the stock stand ready in the investor's brokerage account if the puts are assigned. In the equities market, the investor buys one hundred shares of the stock for every put option that is assigned. The cash needed in the account will therefore depend on the strike price of the option and ...

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