#CashSecuredPuts #CoveredCalls #SellingPuts…(read more)

LEARN MORE ABOUT: IRA Accounts

CONVERT IRA TO GOLD: Gold IRA Account

CONVERT IRA TO SILVER: Silver IRA Account

REVEALED: Best Gold Backed IRA

If you are an investor looking for a way to generate income while limiting your risk, you may want to consider cash secured put options. Offered by Fidelity Investments, this strategy involves selling a put option contract that is backed by cash in the investor’s account.

What are cash secured put options?

Put options give the buyer the right, but not the obligation, to sell a stock at a specified price (strike price) by a certain date (expiration date). In a cash secured put option, the seller of the put option (the investor) promises to purchase the stock from the buyer at the strike price if the stock falls below that price before the expiration date.

To ensure they have the funds to purchase the stock if necessary, the investor sets aside cash in their account equal to the strike price multiplied by the number of shares covered by the contract.

How does it work?

Let’s say an investor sells a put option for XYZ stock with a strike price of $50 and an expiration date one month away. The investor sells the option for $1, which means they receive a premium of $100 (since each option contract covers 100 shares).

If the stock stays above $50 until the expiration date, the option will expire worthless and the investor keeps the $100 premium. If the stock falls below $50, the option is in the money and the investor will be obligated to purchase the stock at $50 per share using the cash set aside in their account.

Why would an investor consider cash secured put options?

One major benefit of this strategy is the ability to generate income through the sale of options premiums. Additionally, by setting aside cash to back the option, investors limit their risk and potentially acquire the stock at a lower price than the market value.

It is important to note that while cash secured puts can be a useful strategy, they are not appropriate for all investors. Those considering this strategy should have a solid understanding of the risks involved and should have sufficient funds in their account to cover the cost of purchasing the stock in case the option is exercised.

Fidelity Investments offers a range of options trading tools and educational resources to help investors make informed decisions, including a comprehensive guide to options trading. As always, investors should consult with a financial advisor before making any investment decisions.