Cash-Secured Puts: Buy Stocks at a Discount While Earning Income

When Apple traded at $220 last September, retirement planning advisor Mark Stevens wasn't interested at that price. His target for the iPhone maker was $200, a 9% discount he felt offered better value for his clients' portfolios.

Rather than wait indefinitely with a limit order, Stevens sold cash-secured puts with a $200 strike price, collecting $3.20 per share in premium. His proposition was simple: either Apple would fall to his target price and he'd buy it at $200, or he'd earn $320 per contract while waiting.

Apple never hit $200. Stevens collected the premium and repeated the strategy the following month, eventually earning $960 in income over three months on the $20,000 he had reserved for each potential stock purchase.

"My clients wanted Apple in their portfolios, but at the right price," says Stevens, who manages $45 million for retirees in suburban Chicago. "This way, we either get our discount or we get paid to be patient."

The Discount Buying Framework

Cash-secured puts serve two primary functions for disciplined investors: systematic discount buying and income generation. The strategy transforms the common desire to "buy the dip" into a mathematically structured approach that pays investors whether they acquire shares or not.

The mechanics are straightforward. By selling a put option, investors commit to buying 100 shares at a predetermined price while collecting immediate income. If the stock falls to that price, they acquire shares at their target discount. If it doesn't, they keep the premium and can repeat the process.

Consider Walmart, currently trading at $100. An investor seeking a 5% discount could sell a 45-day put with a $95 strike price, collecting approximately $215 per contract in premium.

Outcome 1: Walmart stays above $95. The investor earns $215 on the $10,000 reserved for the potential purchase, a 2.2% return in 45 days, or roughly 17.8% annualized.

Outcome 2: Walmart falls below $95. The investor buys 100 shares at $95 but keeps the $215 premium, creating an effective purchase price of $92.85, a 7.15% discount to the original $100 price.

Professional Discount Strategies

Wealth management firms increasingly use cash-secured puts as a systematic approach to building equity positions. The strategy appeals particularly to advisors managing conservative portfolios where clients want specific stocks but at better valuations.

"We're essentially turning our cash into a discount-buying machine," says Patricia Moore, a fee-only advisor in Portland who oversees $120 million in client assets. "Instead of cash earning nothing while we wait for better prices, we're collecting 8-12% annually on our buying power."

Moore typically focuses on blue-chip dividend stocks and broad market ETFs, selling puts 5-8% below current market prices. Her systematic approach involves several key parameters:

Target Discount: 5-10% below current market price for quality large-cap stocks

Time Frame: 30-45 days to optimize premium collection relative to time decay

Assignment Probability: 20-30% likelihood of being required to buy shares

Income Target: 8-15% annualized return on reserved cash

The strategy proved particularly effective during 2023's volatile market. Moore's clients who used cash-secured puts on Microsoft, Johnson & Johnson, and the S&P 500 ETF averaged 11.3% returns on their reserved buying power, while acquiring several positions at meaningful discounts during market pullbacks.

Income Generation in Low-Yield Environment

With 10-year Treasury yields fluctuating and dividend yields on many quality stocks compressed, cash-secured puts offer an alternative income source that doesn't require owning volatile stocks outright.

Regional bank executive Tom Chen has used the strategy since 2019 to generate income on cash he's allocated for eventual stock purchases. Rather than letting money sit in money market funds, Chen systematically sells puts on stocks he wants to own.

"I'm earning 10-12% annually on money that would otherwise yield 1-2%," says Chen, who targets puts on established companies like Coca-Cola, Procter & Gamble, and Verizon. "Even if I get assigned, I'm buying these companies at prices I predetermined were attractive."

Chen's approach focuses on dividend aristocrats, companies with 25+ years of consecutive dividend increases. By selling puts 3-5% below current prices, he creates a dual income stream: immediate premium income plus eventual dividend income if assigned shares.

Mathematical Advantage of Discounted Entry

The mathematical benefits become apparent when analyzing total returns over extended periods. A study of cash-secured put strategies on S&P 500 stocks from 2020-2023 shows that investors who systematically sold puts 5% below market prices achieved:

• Assignment rate: 28% of positions resulted in stock ownership

• Average discount achieved: 7.2% below original market price when assigned

• Income on non-assigned positions: 9.8% annualized return

• Combined total return: 11.4% annually versus 8.1% for buy-and-hold

The strategy's effectiveness stems from volatility asymmetry. Markets tend to fall faster than they rise, creating opportunities for put sellers to acquire shares during temporary declines while earning income during extended uptrends.

Risk-Adjusted Implementation

The primary risk in cash-secured put selling is stock ownership risk—the same exposure faced by any equity investor. However, the built-in discount and income collection provide some downside cushion.

Professional implementation typically involves several safeguards:

Quality Filter: Focus on stocks you'd confidently hold for 3-5 years

Diversification: Limit exposure to any single position to 5% of total portfolio

Market Timing: Avoid selling puts immediately before earnings or major announcements

Strike Selection: Target strikes that provide meaningful discounts while maintaining reasonable assignment probability

During market downturns, disciplined put sellers often outperform because they're systematically buying quality stocks at discounted prices rather than panic selling.

Current Market Opportunities

Today's market environment presents compelling opportunities for cash-secured put strategies. Elevated volatility has increased option premiums, while many quality stocks trade at valuations that offer attractive entry points for patient investors.

The S&P 500 ETF (SPY), for example, currently offers 45-day puts at 5% below market price yielding approximately 1.0% in premium, equivalent to 8.1% annualized income if repeated monthly without assignment.

The Bitcoin ETF (IBIT) offers 45-day puts 5% below market price yielding roughly 3.8% in option premium, equivalent to 30.8% annualized income if repeated monthly without assignment.

Individual stocks also present more attractive opportunities. Disney (DIS) puts 5% below current prices yield roughly 2.0% monthly, 24% annualized, while Nike (NKE) offers similar returns of 2% monthly, 24% annualized, for investors willing to buy the dividend stock at a discount.

Tax Efficiency Considerations

Cash-secured puts offer tax advantages over traditional income strategies. Premium income is generally taxed as short-term capital gains only when realized, and if assigned, the premium reduces the cost basis of acquired shares, potentially converting ordinary income into long-term capital gains.

This tax treatment makes the strategy particularly attractive for investors in higher tax brackets seeking income alternatives to taxable bonds or dividend-focused funds.

The Long-Term Wealth Building Perspective

The most successful practitioners view cash-secured puts as a patient wealth-building strategy rather than a trading technique. By systematically offering to buy quality stocks at discounted prices while collecting income, investors create a disciplined framework for equity accumulation.

"It's anti-speculation," says Stevens, the retirement advisor. "We're not trying to time the market or predict short-term moves. We're simply saying we'll buy these great companies at fair prices, and we'll get paid to wait for those opportunities."

The strategy's behavioral benefits may be as important as its mathematical advantages. It removes emotion from stock purchases, prevents chasing momentum, and creates a systematic approach to building equity positions over time.

For investors seeking to combine income generation with disciplined stock accumulation, cash-secured puts offer a compelling framework, one that pays you to be patient while positioning for long-term wealth creation through equity ownership at attractive prices.

Probabilities over predictions,

Andy Crowder

Want More Options 101 Lessons?

This article is part of our Options 101: First Steps to Trading series at The Option Premium, designed to build a rock-solid foundation for options traders.

👉 Subscribe to our free newsletter to get:

• Weekly educational articles

• Step-by-step trade breakdowns

• High-probability portfolio strategies

We’re here to help you trade smarter, with confidence, clarity, and consistency.

📺 Follow Me on YouTube:
🎥 Explore in-depth tutorials, trade setups, and exclusive content to sharpen your skills.