Arjun Tandon

Arjun Tandon



What are CASH SECURED PUTS? I suppose lot of people want to know more about Cash Secured Puts (CSP). Simply put, there are 3 scenarios for trading a put: 1. Hedging - put long 2. Speculation - put long/short 3. Investment - put short Point no. 3 is what CSP is all about. (1/n)

The most obvious way to invest in the market is to simply buy a share. However, another way (and a great one) is to short puts. You decide upon a strike (level) at which you're willing to buy the stock and short the put there. (2/n)

The premium you receive for the same is your maximum profit on the put. In case the stock falls and remains below that level at expiry, you get delivery of shares (atleast one lot) at a price equivalent to (strike price - premium received). (3/n)

The reason it's cash secured and not a speculative trade is that you have 100% of the notional value kept with you as cash. So basically, you're not leveraged at all. (4/n)

Let's understand with an example of Bajaj Finance. Say suppose we're not willing to buy the stock at CMP, however we find it attractive at INR 6000. One option is to keep waiting for the stock to come to our level. (5/n)

Another is to short the put at strike 6000 for INR 91. If the stock remains above 6000, we make 1.5% for the month, however if it falls below our strike and say closes at 5800 at month end, we take delivery and add it to our portfolio at 5909 (6000-91). (6/n)

Why CSPs are a great way to invest? 1. You only buy a stock when it comes below your level/ strike 2. Keep pocketing the premium if it doesn't 3. There are times when the stock falls and you still make money as your strike has not been breached 3. You're not leveraged (7/n)

Note that in case the stock runs up, you'll just gain the premium amount. That is a con of CSPs vs. buying the stock outright. But then you also get to take advantage of the juicy premiums when IVs are high. (8/n)

Put writing is mostly dreaded by people as talks of "black swan" haunt them. If done right and with nil to low leverage, it can be a great way to generate alpha as well as build a portfolio. Hope you see put writing in a different light now. Happy investing! :) (9/n)

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