Selling a put option is usually discussed as a way to collect premium. There is another use: as a disciplined way to buy a stock you already want to own, at a price below today's.
The idea is often called a cash-secured put. In India, where stock options are physically settled, it works in a particularly direct way. This article explains the mechanics, works through an example, and is clear about the risks.
The idea
Suppose you want to own a particular company's shares and you would be happy to buy them somewhat below the current price.
You could place a limit order and wait. Or you could sell a put option at that lower strike. In exchange, you receive a premium immediately.
Two outcomes are possible at expiry.
The share stays above the strike. The put option expires worthless. You keep the premium and do not buy the shares. You can repeat the process in the next expiry if you still want the stock.
The share is below the strike. The put option is in the money. Because stock options in India are physically settled, you take delivery of the shares at the strike price. You have bought the stock at the price you wanted, and the premium received lowers your effective cost.
The essential condition is in the name: you must genuinely want to own the shares at the strike, and have the full money to pay for them. Without both, this is simply a sold option with large risk.
A worked example
A share trades at 1,000. You have studied the company and would be happy to buy at 950. One lot is, for illustration, 500 shares.
You sell one 950 put option expiring in a month at a premium of 15 per share, receiving 7,500 (15 × 500).
If the share ends above 950: the option expires worthless. You keep 7,500. You do not own the shares.
If the share ends at 930: the option is in the money. You take delivery of 500 shares at 950, paying 4,75,000. Your effective cost per share is 950 − 15 = 935. The shares are worth 930 at that moment, so on paper you are slightly down, but you own a stock you wanted at a lower price than when you started.
If the share ends at 800: you still take delivery at 950. Effective cost is 935, but the shares are worth 800 — a loss of 135 per share, or 67,500 on the lot, on paper.
This last case is the real risk. You were obliged to buy at 950 however far the price fell. The premium cushions only a small part of a large drop. The figures are illustrative; actual lot sizes and premiums vary.
Margin and the cash you actually need
Margin while the position is open. Selling a put option requires margin, which the broker blocks. It is usually a fraction of the contract value.
Cash for delivery. If the option ends in the money, settlement requires the full contract value — 4,75,000 in the example. Brokers generally increase margin requirements on in-the-money stock options as expiry approaches, and may close positions that do not have enough funds.
The name “cash-secured” means holding the full amount needed to buy the shares, not just the margin. If you only hold the margin, you are effectively leveraged: a fall could leave you obliged to buy shares you cannot fully pay for, with the broker closing the position at a loss.
Lot sizes are large for many stocks. One lot can represent several lakh rupees. That limits this approach to investors with substantial capital earmarked for that particular stock.
Risks and limitations
Large falls. The premium is small compared with a sharp drop. You can end up owning shares well above their market value.
Missing a rally. If the share rises sharply, you keep only the premium and never get the shares at your price. A simple purchase would have done better.
Liquidity. Many stock options are thinly traded, with wide spreads that reduce the premium you actually receive.
Results and events. Selling puts through a company's results exposes you to a gap down on bad news.
Concentration. The lot size can make one stock a large part of your holdings once delivery happens.
Tax mismatch. Premium income from options is treated differently for tax from gains on shares bought through delivery. Keep records and check how each part is taxed.
When it fits, and how it compares
Selling puts to buy a stock fits investors who have already done the research on a company, have set aside the full amount to buy a lot, would be genuinely happy to own it at the strike, and accept that a sharp fall will leave them holding it at a loss on paper.
It does not fit traders selling puts across many stocks for income without wanting the shares, or anybody without the cash to take delivery.
Compared with a limit order: a limit order buys at your price if reached and earns nothing if not. A sold put earns premium either way but obliges you to buy even far below your price.
Compared with a covered call: the two are related. A covered call holds shares and sells a call option above; a cash-secured put holds cash and sells a put option below. Some investors alternate between the two on the same stock.
An account for shares and stock options
Hold the full purchase amount and see margin before selling any option. Free to open
Settlement rules, lot sizes, margin requirements and tax treatment are set by the exchanges, SEBI and tax law and change from time to time. This is educational material, not advice, and no stock or position is recommended. We run no tips group and no signal service, we manage nobody's money, and no return is promised. Sold options can lose far more than the premium received.
Disclosure: the account-opening link on this page is under Atul Shrivastava's Zerodha Authorised Person registration (NSE AP Reg: AP2516003481; Zerodha Broking Ltd. SEBI Reg: INZ000031633) and earns a revenue share. TheFinBaba is not a SEBI-registered Investment Adviser — this content is educational, not investment advice.
Frequently Asked Questions
What is a cash-secured put?
Selling a put option on a stock you want to own, while holding the full amount needed to buy the shares at the strike. You collect premium, and if the option ends in the money you buy the shares.
Do I really get the shares if a stock put option expires in the money in India?
Yes. Stock options in India are physically settled, so an in-the-money put option leads to delivery of shares at the strike price, and the seller must pay the full contract value.
What is the main risk of selling puts?
A large fall in the stock. You must buy at the strike however low the price goes, and the premium covers only a small part of a sharp drop.
Is margin enough to sell a cash-secured put?
Margin lets you open the position, but cash-secured means holding the full amount needed to take delivery. Without it, the position is leveraged and can be closed by the broker at a loss.
How does a cash-secured put compare with a covered call?
A covered call holds shares and sells a call option above the price; a cash-secured put holds cash and sells a put option below the price. They are related and sometimes used in sequence on the same stock.
Related Reading
- Using index options to protect funds
- The covered call it pairs with
- How stock option delivery works
- Liquidity in stock options
- Margin on a sold option
- Researching the company first
Disclaimer: TheFinBaba provides educational content only - this is not investment advice. Trading involves risk of loss.
