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00:00 Josh
Options trading activity ticked up. Yahoo Finance’s Jared Blikre is breaking down the need to know basics before jumping in. Jared.
00:07 Jared
Thank you, Josh. As this record breaking year for options trading draws to a close, we’re helping you add some proven strategies to your options toolkit.
00:15 Jared
The other day we broke down covered calls, which generate income on a stock you already own. And in today’s options playbook, sponsored by Tasty Trade, we’re explaining its cousin, the cash secured put, which generates income for you and can help leg it, help you leg into a stock that you’d like to own.
00:30 Jared
So let’s define it. A cash secured put is when you sell a put option and you set aside enough cash to buy 100 shares at the strike price if you’re assigned.
00:41 Jared
In plain English, you’re getting paid today to make a promise. If the stock drops to a certain level by a certain date, you’re going to buy it there.
00:51 Jared
The upside of this trade is you earn premium income up front. we got some pros and cons here. Plus you’re potentially buying a stock at a lower net price because the premium you collect effectively lowers your total cost of buying the stock.
01:04 Jared
Don’t worry, we’re going to review the simple math in a minute.
01:07 Jared
The downside though is this setup does not make risk disappear. If the stock falls hard, losses can still add up because you own the shares. And because it’s cash secured, your cash is tied up until expiration or until you close the trade.
01:19 Jared
So here’s how this can work with a big liquid name like Microsoft and this is just an example, uh just not a trade recommendation.
01:29 Jared
So let’s check out a uh chart that’s going to be year to date of Microsoft and we’re going to be adding the 200-day moving average, which you can see in blue right here.
01:41 Jared
Now, you can see that the current price is right above the average, which is just above the $470 price level. And this is the second time in a month that this average is being tested.
01:52 Jared
So here’s a simple bet. We’re bullish and we think that the 470 level holds into mid January. But if the price of Microsoft is below that at the end of option options expiration, we’re also happy to own that stock from 470 in that case.
02:07 Jared
Now to the trade details. And we have a pretty good summary here, but bear with me through all the numbers and text.
02:16 Jared
We’re looking at the January 16th, 2026 monthly options. And this example is selling the 470 put for about $9 per share.
02:25 Jared
And let’s translate that into human terms. Each options contract is for 100 shares.
02:33 Jared
So when you sell that put, you immediately collect $9 * 100 or $900. That is your max profit on the trade.
02:42 Jared
And if Microsoft is below 470 at expiration, you can be assigned, meaning that you buy 100 shares at $470 for $47,000 total. But because you already collected $9 per share in premium, your net cost basis would only be about $461 per share.
02:56 Jared
So you’re essentially saying, I’ll get paid to wait and if I have to buy, I’m buying at an effective discount to today’s price.
03:06 Jared
And yes, this is why it’s called cash secured. You’re setting aside the cash to pay for those shares if you end up owning them.
03:15 Jared
And a quick note because these are so-called American style options. You can get assigned the shares at any time, regardless of Microsoft of where Microsoft is trading, but that is not the norm.
03:28 Jared
Now, let’s show the profit and loss on this trade and show how it can vary with where Microsoft shares are trading at the end of options expiration.
03:39 Jared
So first notice that the main profit and loss line at the top is flat and that’s to the right of that 470 price, which is marked with a blue line right here. That’s because your profit is cap.
03:52 Jared
The most you can make is the premium you collected, about $900. If Microsoft rallies, that’s great, but you don’t make any more on this trade than that upfront premium.
04:02 Jared
Then notice how that line starts to decline and slope down to the left after to the left of that 470. That’s because below 470, you’re effectively on the hook to buy the shares at 470.
04:12 Jared
So lower prices work against you.
04:16 Jared
And finally, look at that dotted yellow line around 461. It’s your break even. That’s a price where the premium you collected has been fully used up.
04:24 Jared
Above that, you’re still net positive on the trade. Below that, you start taking losses that are the same as owning the stock.
04:34 Jared
It’s a simple trade in the end, a cash secured put is a great way to try to get paid while you wait, especially if you’ve got a stock that you’d be happy to own, but maybe at a lower price.