Cash-secured put

Definition

A cash-secured put is a short put with the full exercise value held in cash: the writer collects premium and accepts the obligation to buy 100 shares at the strike if assigned. It is an agreement to purchase the stock at an effective price of strike minus premium — or to keep the premium if the stock stays above the strike.

How it works / structure

• Legs: −1 put at strike K, expiry T; cash reserve = K × 100 (the “secured” part — no margin leverage).
• Payoff at expiry: above K, keep the premium; below K, assigned long 100 shares at K with effective basis K − premium (an immediate unrealized loss if the stock is well below K).
• Parameters (engine-executable): strike delta target (commonly 0.15-0.35), DTE at entry, IV gate (iv_rank), premium threshold (premium_per_delta_pctile), management (mgmt-profit-target e.g. close at 50% of premium; mgmt-rolling down/out on tests; mgmt-assignment-handling if assigned).
• Breakeven: K − premium. Maximum gain: the premium. Maximum loss: K − premium (stock to zero).
• Synthetic equivalence: same expiration payoff shape as a covered call at the same strike (put-call parity); differences are carry, dividends, and execution.

When it applies

Willing-buyer theses (“long X at price K − premium”), neutral-to- appreciating expectations over the option’s life, and elevated-IV conditions where the premium prices the downside acceptance attractively. Mismatched when the writer does not actually want the stock — then it is only short volatility with unwanted delivery risk.

Risk profile & failure modes

• Full downside below strike: the premium is small relative to a gap-down; “assigned at K” on a stock now at 0.6K is the strategy’s realized worst case, and it arrives via gap (lens-event-catalyst), not gradually.
• Willing-buyer fiction: the discipline fails when assignment is treated as an error and dumped at the low — the strategy’s logic requires genuinely wanting the shares.
• Opportunity cost of the reserve: K × 100 sits in cash; reserve yield is part of honest accounting.
• Early assignment: American puts deep in the money can be assigned before expiry (ms-expiration-exercise-assignment).

Evidence & limits

Ungar and Moran (2009) analyzed the Cboe PUT put-write index and found it historically delivered equity-like returns with lower volatility (1986-2008 sample) — same volatility-risk-premium engine as buy-write, same caveats: index-level, period-specific, lags in strong rallies, and concentrated losses in crashes. Single-name put-writing inherits idiosyncratic gap risk that index studies do not capture. “Getting paid to buy stocks you love” is marketing folklore — the premium prices the obligation’s risk.

Falsifiable-thesis examples

Illustrations only, not signals:

• “X will close above strike K at expiry, expiring the put worthless” — falsified by X < K at expiration.
• “A 0.30-delta monthly put-write program on Y will outperform holding Y outright on a Sharpe basis over the next year in replay” — falsified by the paired replay.
• “If assigned at K, X will trade back above K − premium within 90 days” — falsified by the price series after assignment.

Cross-references

• Sibling/successor: strategy-covered-call (parity twin), strategy-wheel (the cycle it starts)
• Mechanics: ms-expiration-exercise-assignment, acct-margin-rules (cash-secured vs margin-secured distinction)
• Management: mgmt-profit-target, mgmt-rolling, mgmt-assignment-handling
• Math: greek-delta, greek-theta, opt-iv-rank-percentile