When to use it?
You want to BUY a stock, but at a price below the current level. You have the cash available. You want to monetize your wait for an entry. You accept two outcomes: (a) collect a premium without buying, (b) buy at the discounted price you wanted.
When to avoid it?
A collapsing market (the stock can fall well below your strike — you will be assigned at an unrealized loss). An account too small to block the strike × 100. You do NOT really want the stock — then it is just a disguised short put.
How it works
You SELL 1 put. You BLOCK strike × 100 in cash in your account (collateral). You collect the premium × 100.
At expiration:
• Stock ABOVE the strike: the put expires OTM. The cash is released. You keep 100% of the premium. ROI = premium / blocked cash.
• Stock BELOW the strike: you are ASSIGNED. The blocked cash is used to buy 100 shares at the strike. You now hold the shares at a net price = strike − premium.
Difference vs a margined short put: no margin-call risk. The worst case is becoming the owner of a stock you already wanted to buy, at a discounted price.
Concrete example — wheel on MSFT
MSFT at $420. You want to buy it but you are aiming for $400. You sell a put with strike 400, premium $4, 30 days.
Blocked cash: 400 × 100 = $40,000.
Premium collected: $400.
At expiration in 30 days:
• MSFT at $410 → put OTM. Cash released. You keep $400. ROI = 1% in 30 days = ~12% annualized.
• MSFT at $400 → ATM. Same.
• MSFT at $396 → break-even. P&L = 0 (assigned at 400, worth 396, premium offsets).
• MSFT at $380 → assigned. You buy 100 MSFT at $400. Net price = $396 (with the premium). Position at a $1,600 paper loss, but you hold a stock you wanted at an attractive price.
Next step of the wheel: you now sell a covered call on your 100 MSFT (see the covered call page).
Choosing the strike — where to place the threshold
You want the strike at the price where you WOULD become a willing buyer, not the current price.
Rule of thumb:
• Strike 5-10% below the current price: a modest premium but a high probability of expiring OTM.
• Strike 10-15% below: a substantial premium, a real "support" zone where you become a convinced buyer.
• Strike 15-20% below: a generous premium but a signal that you doubt the stock — check your thesis.
If you place the strike just below a strong technical support level, you maximize the chances the stock rebounds before assignment.
Annualizing the return
The key metric for a cash-secured put: annualized ROI on the capital tied up.
Simple formula: (premium / strike) × (365 / DTE) × 100
Example: premium $4 on strike 400, 30 days:
(4 / 400) × (365 / 30) × 100 = 12.2% per year
Excellent: > 15% per year
Good: 10-15% per year
Average: 6-10% per year
Insufficient: < 6% per year (you might as well stay in cash in a savings account)
Note: this return is not guaranteed — it is the scenario where the put expires OTM. If assigned, you become a long-term shareholder and the return is calculated differently.
Classic mistakes to avoid
❌ **Selling on stocks whose thesis you dislike.** The goal is not the premium, it is acquiring a stock. If you do not really want the stock, it is pure speculation.
❌ **Selling before earnings.** High IV = a fat premium, but also a high probability of a violent move that puts you deep ITM.
❌ **Selling on stocks in free fall.** You are catching a falling knife. The premium looks great, but the stock can keep dropping 40% after your assignment.
❌ **Concentrating too much on one stock.** If you sell 5 CSP contracts on AAPL, you commit $92,500 to a single name. Diversify.
❌ **Ignoring portfolio correlation risk.** Selling CSPs on 10 Canadian banks at the same time = massive sector exposure during a banking crash.
⚠ AMF disclaimer
Options are high-risk derivative products. Losses can exceed the capital initially committed (particularly for uncovered short positions). Polaris provides educational content only — this is not investment advice. Consult a registered advisor (AMF) before any decision and make sure you have the appropriate level of approval from your broker.