Home / Chapter 3
Chapter 3

Cash-secured puts

You want to buy a stock but only at a lower price. Instead of setting a limit order and waiting, you sell a put at that price and get paid to wait. If the stock drops to your target, you buy it. If not, you keep the premium. Either way, you win.

📖 8 min read 🇮🇳 TCS / HDFC

The idea

You’ve been eyeing TCS, currently ₹3,800, but you’d love to buy it at ₹3,700. Two ways to wait:

  1. Set a buy limit order at 3,700 — you buy nothing and earn nothing while you wait
  2. Sell a 3,700 put for ₹50 premium — if TCS drops below 3,700, you buy at 3,700 (₹50 cheaper effectively). If it doesn’t, you keep the ₹50 × 175 = ₹8,750 for a month of doing nothing.

Option 2 pays you to be patient. That’s the cash-secured put.

Why “cash-secured”?

You must have enough cash in your account to actually buy the stock if assigned. If you sell a 3,700 put on 1 TCS lot (175 shares), you need ₹3,700 × 175 = ₹6,47,500 in cash sitting there as collateral. “Naked put” would be selling the put without setting cash aside — much riskier.

A worked example

Example

TCS cash-secured put

TCS is at ₹3,800. You want to own it at ₹3,700.

You sell 1 TCS 3,700 PUT expiring end of month for ₹50 premium. Lot size = 175.

  • Cash needed as collateral: ₹3,700 × 175 = ₹6,47,500
  • Premium collected today: ₹50 × 175 = ₹8,750

At expiry, three scenarios:

A) TCS closes at ₹3,850 (above strike): Put expires worthless. You keep the ₹8,750. Return on collateral: 8,750/6,47,500 = 1.35% for the month (~16% annualized). You get to sell another one next month.

B) TCS closes at ₹3,700 (at strike): Put barely worthless. You keep ₹8,750, no assignment.

C) TCS closes at ₹3,650 (below strike): Put is assigned. You buy 175 shares at ₹3,700. But your effective cost is 3,700 − 50 = ₹3,650 (cushioned by premium). You now own TCS at your target price, having been paid to wait.

The math

Cash-secured put formulas

Maximum profit = Premium collected (if put expires worthless)

Effective purchase price if assigned = Strike − (Premium ÷ Lot size)

Break-even (assigned) = Effective purchase price

When it’s brilliant

When it’s dangerous

⚠️ This is not free money

The premium looks like income but if the stock falls 20% in a week, you’re stuck with shares deeply underwater. Your premium was a small cushion, not real protection.

Ladder strategy: multiple puts at different strikes

Instead of one put at one strike, spread it out:

Example

TCS put ladder

Sell:

  • 1 TCS 3,700 put @ ₹50 → collateral 6,47,500
  • 1 TCS 3,650 put @ ₹35 → collateral 6,38,750
  • 1 TCS 3,600 put @ ₹22 → collateral 6,30,000

Total premium: (50 + 35 + 22) × 175 = ₹18,725/month

If TCS drops:

  • To 3,720: all expire worthless → keep ₹18,725
  • To 3,680: only 3,700 put assigned → buy 175 shares at effective 3,650
  • To 3,620: 3,700 and 3,650 assigned → buy 350 shares averaged
  • To 3,580: all three assigned → buy 525 shares, average cost ~3,614

You legged into a full position at better prices than you’d have gotten by chasing the drop.

Combining covered calls + cash-secured puts: The Wheel

This is the “wheel strategy” — options income for patient investors:

  1. Start with cash. Sell cash-secured puts on a stock you want.
  2. If never assigned, collect premium forever.
  3. If assigned, you own the shares. Now sell covered calls against them.
  4. If the calls get exercised, you’re back to cash. Restart at step 1.

Round and round. Small consistent income. Ideal for accumulating quality stocks.

Indian market notes

Realistic yield

On liquid stocks like Reliance/TCS/HDFC Bank, cash-secured puts 2-4% OTM with 30-day expiry typically pay 0.8-1.5% per month on collateral (~10-18% annualized), depending on volatility.

Higher premium comes with higher assignment risk — check the option chain for realistic numbers before quoting yields.