The cash-secured put is a powerful options strategy that is simple to understand and implement. Here are 5 reasons to trade cash-secured puts in 2021.
Related: Cash-Secured Puts Explained
Table of Contents
- 1. Generate Weekly or Monthly Income
- 2. Take Advantage of Time and Volatility
- 3. Profit From Fear and Doubt in the Market
- 4. Handle Market Crashes Like a Boss
- 5. Hedge Your Cash Against Inflation
1. Generate Weekly or Monthly Income
The foremost reason to trade cash-secured puts is to generate income from your trading account. Each time you sell a cash-secured put, you’ll instantly receive a cash premium that you can use however you want.
You can reinvest the money into your account to see it grow more over time, or spend it however you’d like. Many people dream of creating passive income in their lives so they can spend more time doing the things they love.
This options strategy has the potential to generate significant passive income. Imagine receiving a paycheck from your brokerage account every month. And it’s practically automatic. If you’re someone who wants more freedom and financial independence, this strategy might be for you.
2. Take Advantage of Time and Volatility
Cash-secured puts are a great strategy if you want to take advantage of volatility in the market. They also allow time to work in your favor, rather than against you as in purchasing options.
This is because options prices are partially determined by time and implied volatility. Long-time VIX trader Don Fishback says that when volatility is high, it’s often a great time to be selling pricy options to take advantage of the higher prices.
Another reason that selling puts can be so effective is that your likelihood to profit on the trade increases exponentially each day as the expiration date draws closer. This is also called Theta, and you can read more about that here.
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3. Profit From Fear and Doubt in the Market
Cash-secured puts, when implemented correctly, can be an excellent way to profit from fear and doubt in the market. Fear tends to result in more selling pressure on stocks, which drives the stock prices down. At the same time, a large move in price can lead to a volatility spike.
You can use these opportunities to sell expensive put options to bearish traders, instantly generating large cash premiums. You can also set your put strike price lower in this type of situation while still collecting a significant premium.
Typically you would employ this strategy on a stock that you’d like to own in the long term. This can create Win/Win scenario for you, where you either benefit from repeatedly collecting option premium, or you actually get assigned 100 shares of a company you like – at a price you like too.
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4. Handle Market Crashes Like a Boss
“The time to buy is when there’s blood in the streets”Baron Rothschild, a super rich banker in the 1800s
It can be pretty nerve-wracking to see your trading account take a big hit during a sudden market correction, crash, or even a total bear market. It can even be tempting to sell certain stocks to avoid further losses.
But, events like this also present a huge opportunity to those who are prepared. That’s why you should consider trading cash-secured puts in 2021.
While many investors lose their shirts during market crashes, by using cash secured puts, you could be one of the few and wise traders who had enough cash in your portfolio to take advantage of some massive discounts on stocks you like in the long term.
The idea here is to target stocks that you would actually like to own one day, but you’d rather pay less to get them.
5. Hedge Your Cash Against Inflation
Got cash? Inflation could burn a hole in your pocket. There are a lot of ways to try to stay ahead of inflation, but the general idea is that you need your cash to generate at least 3-5% interest each year.
The problem is, most “high-interest” savings accounts don’t even come close to breaking even with inflation, let alone outpacing it.
That’s why you should consider taking some of that cash and selling cash-secured puts against it. By doing so, you could potentially earn 5-10% on your cash each month as passive income.
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