Trading Cash Secured Put on Paper Trading

What is a cash secured put strategy?

A cash-secured put involves writin g a put option and simultaneously posting cash as collateral if the put option is exercised and shares are obligated to be purchased. A cash secured put strategy requires a moderate level of risk tolerance.

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Why use a cash secured put strategy?

1. Income generating strategy

With a neutral to slightly bullish outlook, selling a cash secured put can help the investor earn a reasonable return on the cash deposit. In return for a premium, the investor assumes the obligation to buy the underlying security at the strike price at any time until the expiration date.

However, if the investor has no intention to own the shares, he can sell the stocks on the market. Alternatively, the investor could close the short put position by buying the put back in the marketplace before expiration and before an assignment notice is received.

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2. Stock acquisition strategy

Suppose an investor is bullish on the underlying security in the long-term and intends to own the stocks. Meanwhile, the stock is considered over-priced, and the investor expects a correction in price very soon. The cash secured put strategy may help the investor acquire the shares below the current price.

The put will be assigned if the stock price is below the strike price at expiration. The effective price of buying the stocks will be the strike price minus the put option's premium. In that case, the investor can purchase the stock at a lower price.

However, the investor takes the possibility of missing potential upside gains if the stock price rises sharply, then the short put profits only to the extent of the premium received.

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Why should you try paper trading?

New to options trading

Some people have a basic understanding of options trading but little or no options trading experience. By selling a cash secured put on your demo account, you can familiarize yourself with:

• How to read an option chain on Webull.
• How to place an order.
• How to analyze your profit and loss of a cash secured put strategy.

Practicing with a paper account before using real funds can help you build confidence and gain experience with complex strategies.

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Limited experience

Some investors may have tried the strategy before but ended up in a loss. The paper trading function can provide an excellent opportunity to review your trading skills. Through practice on the demo account, you can answer questions like:

• Is selling an OTM/ITM put more suitable for my outlook?
• Should I exit the position early?
• Should I roll out the position?

Getting in the habit of reviewing the details of your trading process can help you gain a comprehensive understanding of the strategy. Just remember, experience comes from practice.

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Next step: Try it out on paper trading on our latest mobile version>>>