Make $620 with Cash Secured Puts - Beginner Explanation

So, let's say that there's a stock that you want to purchase. Maybe you want to purchase a couple hundred shares. But the problem is each share is on the expensive side. So, you're trying to figure out, is there a way for me to purchase these shares for a discounted price while getting paid doing so? And the answer is, I know this sounds silly, but the answer is yes. And it's through this strategy called selling cash secured puts. And this is an incredible strategy, especially for those of you who want to start generating income. And for those of you like what I talked about in the last video, you want to start selling covered calls, but you want to purchase your shares for a lower price before you start selling covered calls. So, in this video, I'm going to go over what cash secure puts are, the mechanisms of how this whole thing works. I'm then going to talk about the criteria that I use to pick stocks and ETFs that are good for this strategy, and then I'll do a step-by-step tutorial, and then talk about the pros and cons, the risk, and reward. Now, I'm going to share my screen here. If you haven't done so already, I know I've always say this in all my videos. All of my resources, all of my study guides are down below in the description somewhere around the screen. So, you can download it and follow along. I really believe that it's going to help you effectively learn all of this if you see this side by side. So, let's first talk about what are cash secure puts. Now again like what I said a cash secure put is an income generating an income option strategy where you are going to sell someone else the right to sell you shares at a specific price. This is called the strike price by a specific date. This is called the expiration date. And in return you collect income which is called premium. So, if I were to simplify this all the way down, it really comes down to two steps on how to sell a cash secure put. The first step is you need to own the cash to purchase 100 shares of a stock or multiples of 100 shares. So, 200 shares, 300 shares, 400 shares, etc. That's step number one. Step number two is for you to sell one contract to sell that cash secure put contract. That's it. Those are the two steps essentially. Now I know I defined this and this was a whole bunch of words, a big giant paragraph here. So what does this all mean? Well, again I like to speak in analogies. So let's give an example, right? Let's use this car insurance example. And basically you are going to act as an insurance company. So how do insurance companies make money? Well, they basically sell insurance to people like car insurance to people to drivers. And essentially what happens is a lot of people will purchase this insurance and they will drive their car and if they get into an accident then they can go to their insurance company to ask them if they can cover for their damages. But let's be real here. Most of the time, if you're a good driver, right, most of the time these drivers don't really get into car accidents every month or, you know, every year. So nothing really happens. So what ends up happening is that the driver you will usually just pay the premium to your car insurance company and they just collect a whole bunch of money right year after year. So when we are the cash accur seller, we are taking on the role of an insurance company where we sell insurance to these stockholders, these shareholders and if their shares quote unquote get into an accident, they crash or something, then we will shell out the money to cover for those, you know, quote unquote damages. Hopefully this makes sense. Okay, so again, what does an insurance company do? They collect premium upfront, right? This is money in your accounts immediately. Now, in order for the insurance company to work, they need to have cash on the side to cover for the damages, right? They're ready to cover if something goes wrong. So, let's take a look at an example. So, we're going to look at a fictitious example, ABC. Let's say that ABC stock, just like in the other video, it's trading around $100 per share. You like the stock, you like the fundamentals. Great. So, what you're going to do is you're going to go to the marketplace, Facebook marketplace, Craigslist, or in this case the option chain, right, where everyone is buying and selling these contracts, buying and selling these shares. And you say, "Okay, I see that there is a stock right here. It's $100. I feel like it's too expensive. I want to purchase these shares for a lower price." So, when you go on the option chain and you go, "Okay, you know what? I am comfortable purchasing shares for $99 each and I want to purchase a 100 shares of them. Great. Okay. So, you see that you click on that. Perfect. So, when you go to the option chain, when you look under the premium, you're going to see that the premium is $200. So, this is the money that you get to collect for every 100 shares that you are willing to buy for $99. So, what does this mean? Okay. So, what you're actually agreeing to when you sell this cash secure put is you are agreeing to purchase 100 shares of this stock at a discount. Right? Right now it's $100. You want to purchase them at $99 a share. And this is the strike price that you chose, $99 by an expiration date that you choose. So maybe you don't want to purchase the shares outright right now. You want to purchase the 100 shares in 30 days or 45 days, right? So you get to choose the expiration date. Okay. So, if we are going to sell this cash secure put, right, and we want to purchase these shares for $99 each, what does that mean? That means that we need cash secured in our account. So, we need $9,900 because $99* 100 shares is $9,900. This needs to be in your account for you to execute this trade. All right. So there are two scenarios that are going to happen at the expiration date in the next 30 days, next 45 days. So if we see that ABC, this is scenario one. If we see that ABC stays above $99, like the stock right now is $100 and it just continues to go upwards to $101, $102, $103, great. The stock did not quote unquote crash. It did not get into an accident. So that means that you get to keep $200 of the premium because the stock the car didn't crash, right? So when that expiration happens and the contract just expires worthless, right? It just we go to that expiration date and now the contract is over, right? It expires worthless, then we can sell another cash secure puts the following month and then collect even more premium. So that's scenario number one. Scenario number two. Well, what if ABC falls below $99? What if the car or the stock quote unquote temporarily crashes? It hits a tree or uh something happens geopolitically and the stock kind of trends down to $98 or $97. Well, you still get to keep the $200 premium. And what's going to happen is you are going to then automatically purchase 100 shares at the agreed upon price, $99 each, right? And then what happens is when you get those shares, you can then move over to selling covered calls because now you have a 100 shares, you have the ability, the option to sell a contract to collect even more premium. Hopefully this makes sense. Okay, so these are the generally the only two scenarios that can happen. It can either stay above $99 or it can fall below $99. Okay, so let's think about this as the car insurance company, right? Because who we choose as the driver that we want to insure really dictates how we are going to win at this whole car insurance game. Okay. Now remember car insurance companies they make billions of dollars every year, right? Because they know that statistically the math works in their favor. They know that the majority of the drivers out there who have car insurance that are paying you premium, right, paying you as the company premium every single month, they know that the drivers are most likely not going to get into an accident. Okay? So, with that in mind, when we are the car insurance company, we also have to choose stocks and ETFs kind of like the way they choose their drivers. We want to choose responsible drivers that are not just hitting trees and buildings and they think driving is like playing GTA, right? So what are the guidelines? Very similar to choosing stocks and ETFs for cover calls. Same exact four guidelines that I like to follow. These are not hard set rules, but you can pick and choose whatever you're most comfortable with. So first, I like to choose stocks and ETFs that are part of a large index. again like the S&P 500, NASDAQ 100 or Dow Jones 30. Second, we want to make sure that they are fundamentally strong that these companies, these ETFs hold companies that have topline revenue that are increasing year after year. They have amazing businesses, stickiness, people love their products and services. The third criteria is they are technically upward trending. Okay, I can't emphasize this enough because a lot of people who when they start selling cash secure puts, they tend to gravitate towards stocks that continuously drop year after year. Those are the drivers, the stocks that you do not want to insure because they just keep going down, which means that when they get into an accident, you're most likely going to have to cover for their vehicle. You're going to have to cover for their car. So, that's not what you want. You want to make sure that by looking at the performance over the one year, fiveyear, or even the three-month charts if you want to really zoom in that it is upward trending or at least in the short term it's neutally trending, but in the long term it's upward trending. Okay. And the last criteria is it's not that important, but maybe it most likely pays some sort of dividend, right? It shows that the company is mature for them to pay out small little bit of cash to their investors every quarter. So if we want to, you know, before we go into the tutorial, what's a company that fits all four of these guidelines? Well, Amazon is currently one of these stocks that I am currently trading the uh, you know, selling cash secure puts on and selling covered calls on. So this is Amazon right here. So let's move on over to the tutorial. Okay, so this is really important. How do we actually execute this on our computers, on our laptops, on our phones? So, let's use Amazon, ticker symbol AMZN, as our example. We see the 5-year chart. Great. It's going upwards. Awesome. We love the fundamentals. It's a great company. Cool. So, the first thing that we're going to do is we're going to go to our options platform. So, again, just like the other video, we're going to go on Think or Swim, which is part of Charles Schwab. It's a free platform that you can just open up. You don't need to even put money inside. And you can even use paper trading where you're just using monopoly money, right? You're just practicing how this whole options, this strategy works, right, mechanically. So, we're going to type in the ticker symbol A M ZN in the little search bar right here. Great. Once you see this, you're then going to click on the option chain button right here. Okay. Before I even move on, remember in order to execute this strategy, there are two steps. What are they? First, you need to have the actual money inside your account if you want to purchase your shares, 100 shares, right? And then the second step is this step right here. We're then going to sell the contract. So, we can click on the option chain. This whole thing is going to drop down and we're going to choose an expiration date, a date that we feel comfortable purchasing the shares for into the future. So, we're going to choose somewhere between 30 to 45 days. So, let's just say for example, we choose the June 26, 2026 expiration date. Okay, just an example here. Cool. We click on that. Awesome. You're then going to see all of these numbers here. And just like what I said in the previous video, when you look at this, I know it seems complicated to a beginner, but I'm going to break it down here. All of the numbers on the left represent all of the call options for cover calls, but we're not selling a cover call right now. So, we're going to focus all of our attention to the numbers on the right. All of these numbers represent the put options. And when you look at all these numbers in all these columns and rows, the only columns that you really need to focus on right now as a beginner is the strike column and the bid column. That's it. Okay? Strike column and bid column. So, if Amazon is trading at $265, I'm just going to round up just for the simplicity of the math, right? Let's say Amazon is $265 right now. And you go, hey, one share is very expensive because I need to purchase I want to purchase 100 shares. So, I want to purchase these shares for a lower price at $260. So, you're going to first go to the strike column and you're going to go all the way down to 260. and you see that, oh, okay, great. Line it up to the right under the big column. You can see where it intersects that the premium that is paid is $620 per share. Now, remember, you're willing to purchase 100 shares of this stock. So, if you multiply this by 100, $6.20 * 100 means $620. This is the premium that you can collect for selling this cash cure put. Okay, great. So once you say, "Okay, I like this number right here." You can click on that premium number. Great. What's going to happen is this menu is going to pop up and then you're going to make sure that all of your numbers are correct. You are first selling a cash secure put. You're not buying, okay? You're selling one contract because one contract controls 100 shares. One contract enables you to purchase 100 shares. And you're going to make sure that the expiration date is correct, that the strike price is 260, which is the price that we want to purchase. You want to purchase the shares for this is a cash secure put, not a call. Then just for simplicity sake, like what I talked about in the other video, let's just keep it as a market order and then just keep it as day. Okay? If you want to keep the order the trade on for the next 90 days, you can choose good to cancel or GTC. But just for, you know, purely beginners sake, we're just going to choose day. Then we're going to click on review. Okay. And once that happens, you can click on send, submit. Boom. Done. You now collected how much? $620 of premium into your account. Awesome. So, what happens at expiration, right, once you sell this contract, what happens at expiration? Well, two things are going to happen. First, Amazon could stay above $260. This means that Amazon did not get into a car accident. It's just trending sideways. It goes up a little bit maybe to 262, 267, $270. Great. You still get to keep the $620 worth of premium because remember, you are the car insurance company. The driver or the stock that you insured did not get into an accident, but they still paid you and you still get to keep their money no matter what. Okay? And because that happened and after the 30 days or 45 days or whatever the expiration date is, you get to end the contract because the contract expires worthless and then you can sell another cash secure puts the following month. You can choose another person, another stock that you want to insure. Now the second scenario is Amazon falls below $260. Do you still get to keep the $620? Yes, you do. Because again, you are the car insurance company. You get paid no matter what because you already fulfilled your obligation for that contract for you insuring the stock, insuring the driver. You get to keep the $620. And then what happens is if the stock falls to maybe $259, $258, great. You get to purchase 100 shares at $260 each. Okay. So once you have the 100 shares assigned to you, what can you do? That's right. you can then turn it around and then sell a covered call against your new 100 shares to collect even more premium. So, if you haven't watched that covered call video yet, watch that so this way this whole video here makes sense. Okay, so let's go back to the whole car insurance example here. Why does this make sense? Well, if you think about it in terms of the driver, the stock, right? The person with all of the shares, why would they want to sell it to you for $260? Well, it's because again, you are the car insurance company. So, if the stock does go from say $265 to maybe $250, well, you are going to be contractually obligated to purchase the shares for $260. Even if the stock goes down to 250, $240, $230, right? You still are contractually obligated to purchase the shares for a higher price, $260. So, if you think if you're worried about this, well, again, you know, think about it from that long-term perspective. If you chose a good driver, right, then it's okay. In the long term, Amazon or maybe these other blue chip value stocks, they are going to continuously go up anyway, right? So, it's just maybe like a driver who just hit the curb or something like that or maybe hit a little bush or something like that. It's a small little accident, but afterwards, the driver is still okay. everything's good and then they don't get into any more accidents in the future. So again, these drops in the stock market are very normal, right? It's always normal for every single stock, every single index. All right, that we don't always go up in a straight line. So this is why people are willing to purchase these our insurance, these insurance uh contracts from you as the cash put seller. Now, let's talk about risk and reward. Again, like what I just talked about, the main risk is it's possible that you get assigned the shares for a higher price if the stock drops, which again goes back to the idea. I keep saying this on repeat. We want to make sure that we choose a good driver, a good stock that hits those four criteria. Otherwise, you're going to be assigned these shares for a very high price, and the stock just keeps going down and down and down. This is something that you don't want to happen to you. Now, what are the rewards? Well, let's talk about cost basis. Very similar to selling covered calls, when you sell a cash secure puts, right? You purchase the shares for $99, but if you think about it, you also got that $200 premium or that $2 per share premium. That means that you actually didn't really purchase the shares for $99. You actually purchased them for $97, right? Because you purchased them at $99 and you got $2 back because of the premium. and then you can subtract it from the 99 which means that you actually purchase the shares for $97. Okay, hopefully this makes sense. So this is an income strategy that a lot of retail investors do. A lot of institutional investors use these hedge fund managers, money managers, they all do this. Even the greatest investor of all time, Warren Buffett, also loves to sell cash secure puts, especially on the S&P 500 because why not? If they have a lot of cash on hand, then they might as well just sell this insurance to people where maybe against the S&P 500 where they know that it's not really going to drop that fast that, you know, that significantly in a short amount of time and they're just collecting premium from people over and over again every single month. Okay. So, if we take a look at maybe the scaling perspective, right? If you are a car insurance company and you insure one car, that's $300 a month. But what if you have 10 cars that you're insuring? That's $3,000 a month. Right now, going back to the stock market example, if you're able to collect $200 per month from one contract that you sell, great. What if you had 10 contracts? That's $2,000 a month. What if you have 30 contracts? That's $6,000 a month. I know this sounds a little bit crazy. It's like, "Oh, Steve, I need a lot of money to do this." But remember in the stock market as you collect more income as you collect more and more of these premiums you are contributing into your accounts then your money is going to naturally compound and grow over time right so if you really kind of really relate this back to the other videos that I talked about this is what people do in the stock market they invest in the stock market for the long term right let it compound over time and for those individuals who say hey I already have cash I want to generate some short-term income then this is something that they can do too because why not? It's already sitting there. I can sell these contracts, make use of my money, and then collect some premium month after month. Okay? All right. So, hopefully this makes sense. If you have any questions, let me know down below. But yeah, if you haven't downloaded this study guide, download it right now. And I really hope this helps and I'll see you in the next video.