Selling cash secured puts on stocks an investor is happy to take ownership of is a great way to generate some extra income. A cash-secured put involves writing an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock. The goal is to either have the put expire worthless and keep the premium, or to be assigned and acquire the stock below the current price. It’s important that anyone selling puts understands that they may be assigned 100 shares at the strike price.

Why Trade Cash Secured Puts?

Selling cash secured puts is a bullish trade but slightly less bullish than outright stock ownership. If the investor was strongly bullish, they would prefer to look at strategies like a long call or a bull call spread. Investors would sell a put on a stock they think will stay flat, rise slightly, or at worst not drop too much.

Cash secured put sellers set aside enough capital to purchase the shares and are happy to take ownership of the stock if called upon to do so by the put buyer. Naked put sellers, on the other hand, have no intention of taking ownership of the stock and are purely looking to generate premium from option selling strategies.

The more bullish the cash secure put investor is, the closer they should sell the put to the current stock price. This will generate the most amount of premium and also increase the chances of the put being assigned. Selling deep-out-of-the-money puts generates the smallest amount of premium and is less likely to see the put assigned.

ALAB Cash Secure Put Example

Astera Labs (ALAB) continued to soar last week as the stock is on track for its fourth straight big monthly gain.

As a recent IPO stock, implied volatility is very high, which means juicy options premiums.

Implied volatility is currently at 73%, much higher than other AI stocks such as Nvidia (NVDA) which is sitting at 38%.

ALAB specializes in connectivity solutions for AI and cloud data centers. 

In the September quarter, the company reported adjusted earnings of 23 cents per share on $113.1 million in sales, a 206% revenue increase year-over-year, surpassing analyst expectations. 

Following these results, ALAB stock surged approximately 30%, reflecting strong investor confidence. 

Astera Labs' recent product launches, including the Scorpio Smart Fabric Switch portfolio, position it as a notable player in the AI chip industry.

With ALAB trading around $142.15, the January put option with a strike price of $135 was trading around $6.75. Traders selling this put would receive $675 in option premium. In return for receiving this premium, they have an obligation to buy 100 shares of ALAB for $135. By January 17, if ALAB is trading for $130, or $125, or even $100, the put seller still has to buy 100 shares at $135.

But, if ALAB is trading above $135, the put option expires worthless, and the trader keeps the $675 option premium. The net capital at risk is equal to the strike price of $135, less the $6.75 in option premium. So, if assigned, the net cost basis will be $128.25. That’s not bad for a stock currently trading at $142.15. That’s a 9.8% discount from the price it was trading on Tuesday.

If ALAB stays above $135, the return on capital is:

$675 / $12,825 = 5.26% in 23 days, which works out to 83.52% annualized.

Either the put seller achieves an 83.52% annualized return, or gets to buy a quality stock for a 9.8% discount. You can find other ideas like this using the Naked Put Screener. 

Of the 12 analysts covering ALAB, 11 have a Strong Buy rating and 1 has a Moderate Buy rating.

Summary

While this type of strategy requires a lot of capital, it is a great way to generate an income from stocks you want to own. If you end up being assigned, you can sell covered calls against the long stock position. You can do this on other stocks as well, but remember to start small until you understand a bit more about how this all works.

Risk averse traders might consider buying an out-of-the-money put to protect the downside. 

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.