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What Is a Cash Secured Put? Cash Secured Put vs Covered Call

30 Jan, 2026

5 mins read

A cash-backed put option is a safe strategy. In this strategy, an investor sells a put contract. They also keep enough money set aside to buy the underlying shares if needed.

This method lets traders earn extra income while being ready to buy stock at a set price. This makes it a popular choice for careful investors.

The fully funded put-selling method is different from speculative strategies. It limits downside risk because the needed capital is already available. This strategy works well in sideways or slightly bullish markets. In these situations, collecting premiums is often more profitable than chasing market swings.

What Is a Cash-Backed Put Option?

A cash-covered put position involves selling a put option with enough cash set aside to buy the stock if the option is exercised. Essentially, the seller is providing a guarantee that they can honour the purchase obligation.

This conservative put-selling strategy lets investors earn income from the premium. It also helps them keep control over possible stock purchases. By keeping funds reserved, the risk of a margin call is eliminated, making it suitable for risk-conscious traders.

How the Cash-Backed Put Option Strategy Works?

The cash-backed put strategy works as follows:

Select the underlying stock you are willing to own.
Sell a put option at a chosen strike price.
Reserve cash equivalent to the total purchase price of the shares if the option is exercised.
Collect the option premium upfront as income.

If the stock remains above the strike price, the option expires worthless, and the trader keeps the premium. If the stock price goes below the strike price, the investor buys the shares at that price. This means they get the stock at a discount, minus the premium they received.

Why Traders Use the Cash-Backed Put Approach?

Traders choose this collateralized put-selling method for several reasons:

Premium Income: Receive consistent income regardless of minor market fluctuations.
Controlled Risk: The full cash reserve ensures obligations can be met.
Discounted Stock Acquisition: If exercised, shares are purchased below market value minus the premium.
Conservative Strategy: Suitable for investors who prefer low-risk income over speculative gains.

Cash-Backed Put Strategy Example (Step-by-Step)

Suppose you are willing to buy 100 shares of XYZ Ltd at ₹500 per share:

You sell 1 put option contract (representing 100 shares) with a strike price of ₹500.
Reserve ₹50,000 (₹500 × 100 shares) in your trading account.
The option premium is ₹10 per share, so you earn ₹1,000 upfront.
Scenario 1: XYZ stays above ₹500 → option expires, you keep ₹1,000.
Scenario 2: XYZ falls to ₹480 → the option is exercised. You buy 100 shares at ₹500, but your effective cost is ₹490 per share after factoring the ₹1,000 premium.

This demonstrates how a fully funded put-selling strategy balances income generation with controlled risk.

Payoff Structure of a Cash-Backed Put

The payoff of a cash-backed put option is asymmetric:

Maximum Profit: Limited to the premium received.
Maximum Loss: Occurs if the stock drops to zero; the loss equals the strike price minus premium, multiplied by the number of shares.

This structure ensures predictable returns in exchange for taking responsibility for potential stock purchases.

What Happens at Expiry in a Cash-Backed Put?

At expiry, there are two possibilities:

Out-of-the-money: Stock price > strike price → option expires worthless, premium is retained.
In-the-money: Stock price < strike price → option exercised, shares are bought at strike price.

Using a cash-covered approach, the trader is always prepared to fulfil the contract without borrowing.

Risks and Limitations of Fully Funded Put Selling

While relatively conservative, the strategy has risks:

Capital Requirement: Large cash allocation reduces liquidity.
Limited Upside: Profit is capped at the premium received.
Market Downturn Risk: Severe declines in stock price can lead to significant losses.
Assignment Risk: The option can be exercised before expiry (early assignment for American options).

Cash-Backed Put vs Covered Call: How They Are Related

Both strategies are income-generating options approaches, but they differ in mechanics:

Feature	Cash-Backed Put	Covered Call
Underlying Asset	Not owned yet	Already owned
Obligation	Buy stock if exercised	Sell stock if exercised
Market Outlook	Mildly bullish	Neutral to mildly bullish
Risk	Limited to cash reserved	Limited to stock value minus premium
Income	Premium received	Premium received

Traders can combine these strategies depending on whether they hold stock or want to potentially acquire it.

Cash-Backed Put vs Covered Call: Which Strategy Is Better?

Cash-backed puts suit investors willing to buy shares at lower prices while generating premium income.
Covered calls are ideal for those who already hold shares and want extra income from options.
Risk profiles are different. Cash-backed puts need you to set aside capital. Covered calls risk losing stock gains that go beyond the strike price.

When Should You Use a Cash-Backed Put Strategy?

This approach is ideal when:

You are bullish or neutral on a stock.
You want steady income from option premiums.
You are prepared to buy shares at the strike price if exercised.
You prefer low-risk, fully funded options strategies.

Is Cash-Backed Put Suitable for Retail Investors?

Yes, retail investors can use it, provided:

Sufficient capital is reserved.
They understand potential losses if the stock drops sharply.
They are seeking income generation rather than aggressive speculation.

It’s often considered safer than naked put selling because the cash reserve mitigates margin risks.

Conclusion

A cash-backed put option is a flexible and safe strategy for traders. It helps them earn income while managing risk. By keeping money set aside for stock purchases, investors can sell puts safely. They can earn premiums and buy stocks at lower prices.

When compared to covered calls, it offers a different risk-return profile. This makes it important for investors to choose a strategy that matches their market outlook and available capital. Grasping the details, payoff plans, and risks helps in using this fully funded put-selling method in real trading.