Options-based income
Cash-Secured Puts
You set aside cash to buy 100 shares at a chosen price and sell someone the right to make you buy them there, keeping the premium whether or not that happens.
A cash-secured put is the sale of a put option fully backed by cash equal to the strike price times 100 per contract. The buyer pays a premium for the right to sell you the shares at the strike, so you are paid to stand ready to buy at a price below the market. If the stock stays above the strike the put expires and you keep the premium; if it falls below, you are assigned and buy the shares at the strike, with an effective cost equal to the strike minus the premium received.
Option premiums Semi-passive
The labels above place this income type before you read a word. The first is the mechanism — how the money actually reaches you, whether by lending it out, owning a slice of something, renting an asset, licensing a right, selling an option or owning a business somebody else runs. The second says whether the income keeps arriving on its own once it is running, or whether it needs work from you to keep coming. Both are descriptions of how the thing is built, not verdicts on it.
How it works
One put contract obligates the seller to buy 100 shares at the strike price if the holder chooses to exercise. 'Cash-secured' means the broker sets aside strike price times 100 in cash the moment the trade is placed, so there is no margin loan involved and no way to be leveraged into the position. The seller picks a strike at or below the current share price, which becomes the agreed purchase price, and an expiration date that fixes how long the obligation runs.
The premium is credited to the account on the trade date, before anything else happens. The reserved cash does not sit dead: depending on the broker, it typically continues earning a sweep rate or money-market yield while it waits, which functions as a second, separate stream of return layered under the option premium.
If the put is assigned, 100 shares arrive in the account and strike times 100 in cash leaves it, converting a cash position into a stock position at a price fixed weeks or months earlier. Equity puts are American-style and can be exercised early; this is most common on deep in-the-money puts with little time value left, since holders sometimes exercise early when the interest they could earn on the strike proceeds outweighs the option's remaining time value. Structurally, a cash-secured put and a covered call at the same strike and expiry on the same stock produce an identical profit and loss profile. Closing early simply means buying the put back before expiration, at which point the broker releases the reserved cash.
What it pays
The payment is the premium collected up front, plus whatever the reserved cash earns while it sits as collateral in a sweep account, money-market fund, or short Treasury bills where the broker permits it. Premium size is driven by implied volatility, time to expiration, and how far the strike sits below the current price, so it rises when the market is anxious about the stock, not when the stock is calm.
Equity puts typically trade with a volatility skew: strikes below the current price carry higher implied volatility than strikes above it, which is one reason put selling tends to collect more premium than a simple symmetric model would predict. Investors commonly quote the payoff as premium divided by cash secured, annualised across the number of cycles per year, but that annualisation is an extrapolation of a single trade, not a rate owed on an ongoing basis.
The maximum profit on any single cycle is the premium received, full stop. There is no participation in a rally: if the stock doubles before expiration, the put still just expires worthless and the seller keeps the premium, nothing more. The maximum loss is the strike minus the premium, multiplied by 100 shares, realized in full only if the stock falls to zero.
Costs and taxes
Per-contract commissions and the bid-ask spread are the direct costs; on illiquid names the spread on a put can be wide enough to consume most or all of a cycle's premium. There is also an opportunity cost if the broker sweeps the reserved cash into a low-paying default account rather than a money-market fund paying a market rate.
Under US tax rules, premium is not taxed when received. A put that expires worthless, or is bought back for a gain or loss, produces a short-term capital gain or loss regardless of how long the position was actually held. If instead the put is assigned, no income is recognized at that moment; the premium simply reduces the cost basis of the shares acquired, and the tax consequence is deferred until those shares are eventually sold.
That lower basis means a larger taxable gain later if the shares are sold at a profit, so the tax is deferred rather than eliminated. Wash-sale rules can also apply: selling a put while holding a recent loss position in the same underlying stock can defer recognition of that earlier loss. Many IRA custodians permit cash-secured puts, since the strategy carries no margin risk by construction, though specific approval levels and requirements vary by custodian.
Liquidity and time commitment
The cash backing a short put is unavailable for anything else until the put is closed or expires. A ladder of several short puts across different stocks or strikes can tie up most of an account's cash simultaneously, even though each position looks small in isolation.
The option itself is usually liquid in its own right: in a name with active options trading, the put can typically be bought back the same day the decision is made, at whatever price the market is charging. Assignment, however, can arrive on any morning before expiration without warning, so the account needs enough free cash or margin cushion to absorb the incoming shares without triggering a call.
The ongoing work is organized around each expiration cycle: choosing a strike and expiry, monitoring the stock and the option's value, and deciding whether to let it run, close it, or roll it down and out to a later date. Earnings dates deserve particular attention, since selling a put that spans an earnings report collects an inflated premium precisely because the market is pricing in the gap risk that produced it.
How it goes wrong
The basic failure mode is a stock that collapses well below the strike: the seller is obligated to buy 100 shares at a price far above where the market now trades, and the premium collected covers only a fraction of the loss. This is the same directional bet a stock buyer makes, minus the upside; the put seller carries the full drawdown but keeps none of any rebound above the strike.
Selling puts purely to harvest premium on a stock with no real intention of owning it can turn a routine income trade into an unwanted, concentrated equity position after assignment. Rolling a losing put down and out to avoid taking the loss extends the exposure further and can compound a small loss into a much larger one spread across many cycles.
Laddering several puts across strikes without adding up the total obligation can mean assignment on multiple contracts at once consumes far more cash than expected. This risk concentrates exactly when it is least convenient: in a market-wide selloff, many short puts get assigned simultaneously, which is the same moment cash tends to be most valuable elsewhere. Selling puts against margin rather than fully securing them with cash is a related but materially riskier trade, and some brokers permit it even though the risk profile is very different.
What to remember
- Selling a cash-secured put means setting aside strike price times 100 in cash and getting paid to agree to buy 100 shares at that price if the stock falls there.
- Maximum profit is capped at the premium received; maximum loss is the strike minus the premium, reached if the stock goes to zero.
- Premium expiring worthless is a short-term capital gain; assignment instead lowers the cost basis of the shares, deferring tax until they are sold.
- Premium size is driven by implied volatility, time to expiry, and distance of the strike below the market price, with downside strikes typically pricing richer than upside ones.
- Reserved cash is locked up for the full cycle and can be immobilised across a ladder of positions, with assignment risk concentrated in market-wide selloffs.
- The position is the mirror image of a covered call at the same strike and expiry, and carries full downside exposure with no participation in a rally.
This page explains how the income type works, which does not change from week to week, so it deliberately carries no rate and no price. The links below go to the pages that hold the current figures for it, each one stamped with the date the data was pulled. Read the mechanism here first: the numbers there are far easier to judge once you know what they are measuring.
See the live numbers: Options Income.
Frequently asked
What does 'cash-secured' actually mean?
What is my cost if I get assigned?
Is selling a cash-secured put safer than buying the stock?
How is the premium taxed if the put expires worthless?
Written for information only. Nothing here is investment, tax or legal advice, and no page on this site recommends buying or selling anything. Rules and tax treatment change; verify anything that matters with a professional who knows your situation. This explainer was drafted by a language model (claude-sonnet-5) from an editor-approved outline and fact sheet, under the rules set out in our editorial policy, and carries no market figures. Last updated Jul 29, 2026.