Everything You Need to Know About A Cash Secured Put Screener
Cash secured puts can provide you with a regular income if used correctly, therefore it makes sense to use a cash-secured put screener to help you.
As an investor, it is hard to decide when risking your money on stocks. It takes time and you must consider all the variables before taking the plunge.
If you are planning on making a big purchase and you have a hunch that it might go on sale next week, what are you going to do? Will you wait and see or buy now? How long are you going to wait? What is your ceiling price before deciding to buy?
These questions are all valid and they apply in investing too. Particularly when you are buying stocks for a company.
Cash secured put
Now, there is a way to go about it. If you want to earn an income but also not mind owning the stocks, so you will not buy them right away, there is a method that you can use.
This is called a cash-secured put, and we will also look at cash-secured put screener, which is a screener that you should be able to configure on your broker app or software.
What is a Cash Secured Put Screener?
If you choose options because you want flexibility in buying or selling shares in the future, you will need special tools to maximize profit. Aside from using a popular strategy called cash-secured put, you will also need a cash-secured put screener to grow your earnings.
This tool is used to scan market data for income-producing cash-secured put options.
The user can choose from different criteria and filters like the range of prices, expiration dates, strike prices, and stock fundamentals to find the best position to trade.
The cash-secured put screener will produce a list of stock positions based on the criteria. It will show different data like the current market price, available strike prices for the current put option and the downside protection.
And from these data, the investor can determine if a particular put option is good for their portfolio. By comparing the income they earned against the risk of a decline in the stock price and the ownership, the users can find the best cash-secured puts.
Your broker app or software, for example Thinkorswim, will have a screener that you can configure. There are also specialist tools that focus on this, such as Quantcha's screeners.
What is a cash-secured put?
This option is nearly the same as covered calls and users can also generate income using cash-secured puts. Here, they can sell the put option while setting aside a certain amount that would enable them to buy the stock with the help of a cash-secured put screener.
The usual scenario is that the investors start with an out-of-the-money put where the share has to decline to be assigned. The most ideal would be for the share prices to remain the same like in covered calls and simply collect the premium without owning any stocks.Usually, traders use their covered put or covered call screener when searching for their cash secured puts search. The dividend payments are the most significant factor that can affect call and out premium. But, with a cash-secured put screener, this is not a problem.
Cash Secured Put Screener VS Cash Covered Call Screener
There is a great similarity between a cash covered put screener and the cash covered call screener. They share many functions in the sense that they allow users to put the criteria to get a list of options they want to trade. Also, both strategies are devised to give the investor a way to boost their income on their portfolio.
However, that is where their similarities end. Their difference lies in the type of options the user is searching for. Cash secured puts are contracts that bind the seller to buy shares at a pre-determined strike price. Covered calls, on the other hand, bind the seller to sell their shares at the strike price.
Covered calls obligate the investor to own shares of the concerned stocks. Cash secured puts, on the other hand, are different. The investor is assigned shares when the market price of the stocks drops below the strike price and before the expiration.
Generally, cash-secured puts are a great strategy for those who would like to purchase more shares when the prices decline. Instead of simply praying for a price drop, you can trade cash-secured puts. You can generate income for the option sales and buy shares only when the share prices decline below the strike price of your choice.
The last difference between the two is about an option called “being out of the money.” In a cash-secured put, it means the strike price is lower than the current market price for the stock. Meanwhile, in a covered call, it refers to the strike price that is higher than the current market price for the stock.
Having a clear understanding of the “out of the money” concept is critical when you input your search criteria for both covered call and cash-secured put screeners.
When Should You Use Cash-Secured Puts
A cash-secured put is a two-part strategy that involves:
- Selling out-of-money put options while at the same time
- Setting aside capital to buy underlying stocks when it hits the strike price of the option.
The goal of this strategy is simple - to acquire stocks at a price lower than the market’s if the option is assigned to you.
With a cash-covered put, you can make some money while waiting for the stock price to drop. By selling a cash-covered put, you can get the premium from the option buyer. This is made possible because your buyer will pay a premium for the right to sell to you shares of stock, before its expiration at the strike price.
This premium will enable you to lower your cost basis on the assigned shares.
If you are not assigned the shares on or before their expiration date, you can still keep the premium. While you may not be able to acquire your stocks, at least you have earned something while waiting for the stock to drop its price.
Key Takeaways from Cash-Covered Puts
There are two profit potential with this strategy, which can be enhanced further with the help of a cash-covered put screener.
- You can earn from the option trade and if the stocks get assigned. You can get a premium from option trade. The jackpot is when the stock is assigned and you are awarded ownership. The upside is potentially unlimited if the price of these stocks moves higher.
- The risk on cash-covered puts is when the shares of the underlying stocks fall below the stock price. In this case, you will be obliged to buy the shares at their original strike price.