Written by Haydn Froggatt, Director – iInvest Trading & Advisory options desk. Haydn hosts the weekly Options Playbook video series.
Most investors buy shares outright: pay the market price today and hope it goes up. There’s another way to build a position that can either pay you upfront or land you the stock at a lower price than it’s trading at right now. It’s called selling a cash-covered put, and it’s one of the simplest option strategies to understand once you see it in action.
How it works, in plain terms
When you sell a put option, you’re agreeing to buy a stock at a set price (the strike price) if the person on the other side of the trade decides to exercise it, any time up to expiry. In exchange for taking on that obligation, you’re paid a premium upfront, which is yours to keep no matter what happens next.
“Cash-covered” (or “cash-secured”) simply means you set aside enough cash to buy the shares if you’re required to. That’s what makes this a conservative way to use options: you’re not borrowing or taking on leveraged risk, you’re only agreeing to buy a stock you’d be happy to own, at a price you’re happy to pay.
There are two ways this can play out, and both can work in your favour.
A worked example: ANZ
Let’s say ANZ is trading at $36.60. Rather than buying the shares today at that price, you decide to sell a $36.00 put with around two months to expiry, and you’re quoted a premium of around $0.85 per share.
Working in a parcel of 3,000 shares means selling 30 contracts (each option contract covers 100 shares).
The cash you set aside: 3,000 shares x $36.00 strike = $108,000. This is the amount you need to have ready in case you’re required to buy the stock.
The premium you collect upfront: 3,000 shares x $0.85 = $2,550, credited to your account as soon as the trade is placed.
The chart below shows how this plays out compared with simply buying the shares outright at today’s price. Selling the put keeps you flat once ANZ is above $36.00 (you’ve banked the premium either way), then tracks the same 1-for-1 loss as owning the shares once it’s below $36.00, just starting from a lower breakeven.
Payoff at expiry: the solid line is selling the $36.00 put; the dotted line is buying ANZ shares outright at $36.60.
From here, there are two outcomes at expiry.
Outcome one: ANZ stays above $36.00
If ANZ is trading above $36.00 when the option expires, the put simply expires worthless. Nobody exercises the right to sell you shares at $36.00 when the market price is higher. You keep the full $2,550 premium, your cash is freed up, and you walk away having earned about 2.4% on the $108,000 you had set aside (before brokerage, and not annualised), for a few weeks’ commitment, without ever owning the stock.
Outcome two: ANZ falls below $36.00
If ANZ drops below $36.00 by expiry, the shares are likely to be “put” to you, meaning you buy 3,000 shares at the $36.00 strike, using the cash you’d already set aside. Because you also keep the $2,550 premium, your effective cost per share works out to $36.00 minus $0.85, or $35.15. That’s roughly 4% below where ANZ was trading when you placed the trade.
In other words, you end up owning the stock you wanted anyway, at a better price than the day you started.
Why investors use this to build a portfolio
Selling cash-covered puts suits investors who are building a position over time and are comfortable owning the stock at the strike price. Either the market pays you a premium for your patience, or you buy in at a discount to today’s price. Both outcomes are useful if you were going to buy the shares eventually regardless. And once you own the shares, the strategy has a twin that pays you on holdings you already have – see our guide to covered calls.
The trade-off is worth understanding clearly: if the stock falls well below $36.00, you’re still obligated to buy at $36.00 (offset only by the premium collected), even though the market price has fallen further. This strategy suits money you’re genuinely prepared to invest in the stock at that price, not a way to avoid the risk of the share price falling. And the mirror-image trade-off: if the stock rallies, your gain is capped at the premium – in this example, once ANZ finishes above about $37.45, simply buying the shares outright at $36.60 would have done better.
Worth knowing too: ASX-listed options come in two exercise styles. American-style options can be exercised at any time up to expiry – so if the put you have sold is American-style, the shares can be assigned to you early, not only on the expiry date. European-style options can only be exercised at expiry. Check which style applies to the series you are trading – it is part of the conversation with your broker before the trade goes on.
Common questions
What if the stock falls a long way?
You wear it, less the premium. At expiry you own the shares at an effective $35.15 whatever the market price is – if ANZ has fallen to $30, you hold a position showing a meaningful paper loss, exactly as if you’d bought at $35.15. That’s why the strategy only suits stocks you genuinely want to own and cash you genuinely intend to invest.
Can I close the position early?
Yes. A sold put can usually be bought back at the current market price before expiry – at a profit if the option has cheapened, at a loss if it has become more expensive. You’re not locked in until expiry.
Where can I read more from the regulator?
ASIC’s Moneysmart site has a plain-language guide to exchange traded options, including worked examples of put selling with both outcomes shown. It is worth reading alongside the ASX booklet before your first trade.
Do I need approval to trade options?
Yes – options trading requires a derivatives agreement with your broker before you can place a trade, and your broker will take you through the risks and documentation. Our options trading desk handles this every day, and our options strategies explainer covers the broader toolkit.
Want to talk options through with the desk?
Send us an enquiry and we will take it from there – or call our Burleigh Heads office on 07 5520 8788.
General information only. This example is illustrative, based on hypothetical pricing, and does not constitute personal financial advice. It does not take into account any individual’s objectives, financial situation or needs, and is not a recommendation to buy or sell ANZ shares or options. Option prices and stock prices move constantly and the figures used here are for explanation purposes only, and exclude brokerage and exercise fees. Options involve significant risk and are not suitable for all investors; before trading options, read the relevant disclosure documents including the ASX booklet “Understanding Options Trading” and our Financial Services Guide. iInvest Trading & Advisory is a Corporate Authorised Representative (No. 431611) of Zodiac Securities Pty Ltd (AFSL No. 398350).
