Selling a put is where most traders start selling options. You promise to buy a stock below today's price, you are paid for the promise up front, and you keep the payment whether or not you end up buying. Hold the full purchase price in cash while you wait and the trade is a cash-secured put. This lesson works out what the cash earns, what happens when you do buy, and how to choose the strike.
What you sell and what you set aside
A put gives its owner the right to sell 100 shares at the strike until expiration. Sell one and you take the obligation to buy those shares at the strike if the owner chooses; the premium you are paid is your credit.
Say a stock trades at $100 and you sell the 30-day $95 put for $1.33, which is $133 on one contract. If the put is exercised you must pay $95 times 100, $9,500, for the shares, so that is the cash you keep set aside. The $133 lands in your account the day you sell, so the money you bring yourself is $9,367: the strike less the credit, times 100. That is the collateral, and it is also the most you can lose, if the stock went to zero.
P&L on one $95 put sold for about $1.33 with 30 days left, on a $100 stock at 30% volatility. Above $95 at expiry you keep the credit; below it you lose like a shareholder from $93.67 down. Drag volatility up and the green line drops: a short put is short vega. Drag days toward zero with the stock above $95 and it climbs to the full credit.
Anywhere above $95 at expiration the put expires worthless and you keep the $133. Below $95 you lose a dollar for every dollar the stock falls, exactly like an owner of the shares, cushioned only by the credit, so the breakeven is $93.67. You have sold an option, so you are short volatility: short gamma and short vega, and paid theta for every day that passes without a large fall.
Yield and annualized yield
Put sellers compare trades by the yield: the credit divided by the strike, the cash the trade stands ready to spend. Here that is $1.33 divided by $95, 1.40% for 30 days. To compare a 30-day put with a 45-day one, scale it to a year: 1.40% times 365 over 30 is 17.0% annualized.
Treat the annualized figure as a unit of comparison, not a forecast. It assumes you sell the same put every month at the same price and no month ends with the stock far below the strike. Those months are the whole risk of the trade, and one of them can take back a year of credits.
Assignment: buying the stock at strike minus credit
If the stock finishes below $95, the put's owner exercises and you are assigned: you buy 100 shares at $95 with the cash you set aside. You already kept $1.33, so the shares really cost $93.67 each, 6.3% below where the stock traded when you sold the put. That is the appeal: you own a stock you wanted below the price on the day you decided, and were paid while waiting.
The catch is that you pay $95 whether the stock closes at $94 or $70. Single-stock options are American, so assignment can also come before expiration, most often when the put is deep in the money; Module 13 walked through how the notice arrives.
Parity from Module 2 says a short put is the same position as a covered call at the same strike and expiration, apart from a little interest and dividends. So this trade and the covered call in Module 12 share one payoff and one set of Greeks; the difference is only whether you start out holding cash or holding shares.
Choosing the strike by delta
Closer to the money pays more and is assigned more often; further away pays less and is assigned less. Traders name the choice by delta, because the size of a put's delta is a rough guide to the chance it finishes in the money. The table prices three strikes on the same $100 stock, 30 days out, at one flat 30% volatility.
| Strike | Put delta | Credit | Yield | Annualized | Chance of finishing in the money |
|---|---|---|---|---|---|
| $97.50 | -0.35 | $2.16 | 2.22% | 27.0% | 39% |
| $95 | -0.25 | $1.33 | 1.40% | 17.0% | 28% |
| $90 | -0.10 | $0.40 | 0.44% | 5.4% | 11% |
The 25-delta put is the common middle ground: far enough below the market that most months it expires worthless, close enough that the credit is worth the cash. On a real chain the credits run a little richer than the table, because puts below the market trade at a higher implied volatility, the skew from Module 11.
Put value by strike, 30 days out on a $100 stock: priced off a skewed smile (green) and at one flat 30% (dashed). At the $95 strike the skewed put is worth about $1.53 against $1.33 flat. Drag skew to zero and the lines meet; drag it up and the far strikes gain the most in proportion to their price.
That extra is not free money. The market charges more for those strikes because the falls that reach them tend to come fast, so the richer credit pays for a real risk.
The maths: collateral, yield and the chance of assignment
For a put with strike K, credit P and D days to expiration: collateral = (K - P) × 100, breakeven = K - P, yield = P / K and annualized yield = P / K × 365 / D. For the $95 put: (95 - 1.33) × 100 = $9,367, breakeven $93.67, 1.33 / 95 = 1.40%, and 1.40% × 365 / 30 = 17.0%.
That annualizing is simple, not compounded. Some traders divide by the collateral, K - P, instead of the strike; for the same put that gives 1.42%.
Under the model, the chance a put finishes in the money is N(-d2) while its delta is -N(-d1), with d2 = d1 - v√T. Because d2 is smaller than d1, N(-d2) is always the larger number, so the size of a put's delta slightly understates the chance of assignment at expiry. For the $95 put, v√T is 0.30 × 0.287 = 0.086, d1 is 0.68 and d2 is 0.59, so the delta is -0.25 and the chance is about 28%.
Your turn
Open GOOGL on the Options Chain at the monthly expiration. Find the put with a delta nearest -0.25 and read its Mid. Work out the cash it ties up, its annualized yield and your price per share if you are assigned, then check all three in the Cash-Secured Put Calc.