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The overlooked strategy turning cash into consistent income
Options 10 minutes to read
Koen Hoorelbeke
Investment and Options Strategist
The overlooked strategy turning cash into consistent income
When people hear the word options, they often think of high‑risk speculation – trying to guess where a stock is going next and profiting from the move. Others know options can work as protection – a kind of insurance for your portfolio. But there’s a third way to use options that is far less known, and potentially far more rewarding: generating income.
That’s where cash‑secured puts (CSPs) come in. This straightforward strategy lets you earn regular income from the market while keeping your cash ready to buy shares you already like – but only if they come down to a price you’re comfortable with.
Some investors even call CSPs the holy grail of long-term investing—not because they always outperform, but because they combine income, discipline, and discounted entry in a single, easy-to-understand strategy.
Prices and premiums in this article are indicative and for illustration only.
A limit order that pays you
Suppose a stock—let’s call it ABC Inc.—is trading near USD 500. You would be happy to own the shares at USD 480. Instead of placing a limit order that earns nothing while you wait, you sell a 30‑day USD 480 put and receive USD 10 per share (USD 1,000 per contract).
Two things can happen at expiry:
- Stock ≥ USD 480 – the option expires worthless and you keep the USD 1,000 as income. That is roughly 2.1 % on the USD 48,000 you set aside for just one month.
- Stock < USD 480 – you are assigned 100 shares at USD 480, but the premium lowers your effective cost to USD 470.
Either way, you come out ahead: you collect income or you buy the stock you wanted, but at a discount.
Turning one trade into a strategy
One CSP is useful, yet the real edge shows when you repeat the process. The table below sketches a simple five‑month “wheel” on ABC Inc.
| Month | Action | Premium collected | Total income so far | Effective entry* |
|---|---|---|---|---|
| Jan | Sell Feb USD480 put | USD10 | USD10 | – |
| Feb | Put expires OTM, sell Mar USD480 put | USD9 | USD19 | – |
| Mar | Assigned at USD480, sell Apr USD500 call | USD7 | USD26 | USD470 |
| Apr | Call expires OTM, sell May USD500 call | USD6 | USD32 | USD470 |
| May | Shares called at USD500 | Capital gain USD30 | USD62 total | – |
* Strike price minus first‑month premium.
Starting with USD 48,000 collateral, you collect USD 62 per share: USD 32 in premium plus a USD 30 share‑price gain. That is roughly a 13 % return in five months, before dividends.
Now compare that to a buy‑and‑hold investor.
Let’s say they bought ABC Inc. at USD 480 and sold it at USD 500 over the same period. Their profit is USD 20 per share, or about 4.2 % on their investment.
So while the buy‑and‑hold investor gains from the rising stock, the CSP investor earns from both the stock movement and the consistent option income.
This is how cash‑secured puts can turn patience into profit.
Why this works
Below are three reasons why CSPs can be so effective:
1. You sell time and volatility
Options are often priced for bigger swings than actually occur. By selling puts, you collect that extra pricing cushion.
Take a look at the chart below, which compares 1-month implied volatility (orange line) with historical volatility (green line) for Meta:
What it shows is that implied volatility—the market’s estimate of how much the stock might move—is almost always higher than historical volatility, which reflects how much the stock actually moved. This gap is a long-standing feature of the options market.
For cash-secured put sellers, that difference can be a consistent edge. You’re getting paid for risk that often doesn’t materialise. Even if the stock goes nowhere, time and volatility decay work in your favour, allowing you to keep the premium.
2. You reinvest quickly
If the option expires unused, you can roll straight into the next contract and collect more income.
3. You control the terms
You choose the stock, the price you are willing to pay (strike), and how long you will wait (expiry).
A long‑running study of this idea is the Cboe S&P 500 PutWrite Index. It models selling one‑month puts on the S&P 500 and holding cash for collateral. Over decades, the index has delivered returns similar to the S&P 500 but with gentler ups and downs. In other words, steady option income can keep pace with the market while smoothing the ride.
Where CSPs shine
| Market conditions | Why the strategy helps |
|---|---|
| Sideways or gentle pull‑backs | You earn income even if the stock does nothing, and you buy at a discount if it dips. |
| Moderate volatility | Premiums are rich enough to matter, while gap risk is reasonable. |
| Dividend season | If you end up with the shares, you may collect the dividend as well. |
Risks to remember
- Sharp declines – a sudden 20 % drop still hurts. Diversify and avoid earnings week unless you accept that risk.
- Missed rallies – if the stock rockets higher, you keep only the premium. That is the trade‑off for downside cushioning.
- Capital requirement – each put ties up 100 × strike in cash. Smaller accounts can consider put credit spreads to reduce the outlay.
Final thoughts
Cash‑secured puts are a patient way to earn while you wait. They turn idle cash into a small yet steady income stream and let you buy quality shares at prices you choose.
It’s not about making rash bets. It’s about getting paid to wait – and letting time and discipline work for you, month after month.
Looking for real-world examples?
Below you’ll find links to recent pieces where we walk through actual cash-secured put setups, explain the rationale, and show how the strategy works in specific situations.
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This material is marketing content and should not be regarded as investment advice. Trading financial instruments carries risks and historic performance is not a guarantee of future results.
The instrument(s) referenced in this content may be issued by a partner, from whom Saxo receives promotional fees, payment or retrocessions. While Saxo may receive compensation from these partnerships, all content is created with the aim of providing clients with valuable information and options..
The instrument(s) referenced in this content may be issued by a partner, from whom Saxo receives promotional fees, payment or retrocessions. While Saxo may receive compensation from these partnerships, all content is created with the aim of providing clients with valuable information and options..
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