Picture this: your price alert goes off as your preferred cryptocurrency has finally hit your target price and it's time to gain exposure to the specific token you've been eyeing. However, you hesitate — what if it goes lower and you end up catching a falling knife? Ultimately, you decide to adopt a wait-and-see approach and avoid trading crypto until prices settle amid volatility.
This is the scenario that plays out each time beginner crypto traders are tempted to make an entry. While beginner crypto traders wish to buy the dip, there's a palpable fear each time buying opportunities come. Fortunately, with crypto options strategies like cash-secured puts, you can own the underlying crypto asset at your preferred price if the coin's price ever dips below your chosen strike price at expiry.
Keen to learn more about how you can own your favorite coins and tokens at a discount? From selling put options for passive returns over time to dealing with the underlying crypto once you get assigned, here's everything you need to know about crypto cash secured puts and how selling put options can possibly be a lucrative options strategy in a choppy market.
Deconstructing key options concepts: puts, strike prices, and premium
Before exploring the idea of cash-secure puts, let's first explain some essential terms related to options.
Puts are options contracts that grant the buyer the option to sell a specific asset at a predetermined price by a certain date.
An option's strike price is the price at which the buyer of the put option has the right to sell the underlying asset.
Premiums are the upfront payment received by the seller of the put option in exchange for taking on the obligation to buy and own the asset if exercised.
Assignments occur when options contracts are exercised in-the-money and the option seller is forced to either own or sell the underlying asset at the predetermined strike price.
Now that you're familiar with the basics of options, let's look into what a cash-secured put is and how crypto traders can execute it.
What is a cash-secured put?
A cash-secured put is a bullish options strategy allowing traders to potentially acquire an asset at a lower price while generating premium income upfront. By selling a put option and agreeing to buy the underlying asset if the price falls below the strike price by the expiry date, traders mitigate the risk of assignment and receive a premium regardless of whether the option is exercised. This strategy can be attractive for crypto traders who understand the obligation of purchasing the asset at the strike price if assigned and are seeking a discounted entry point for the asset.
Cash-secured put vs naked put
In many ways, a cash-secured put is similar to a naked put in that both option strategies involve selling a put. The key differences lie in their differing risk profiles. Unlike naked puts, cash-secured puts require setting aside the capital required to purchase the underlying asset if the crypto option is exercised. This mitigates the risk of potential margin calls during assignments and makes cash-secured puts the go-to options strategy for more risk-conscious options traders.
Why is the cash-secured put option strategy so popular?
As previously mentioned in our imagined scenario, it can often seem tough to start a long position in crypto even when price alerts are notifying traders that the coin or token is at the trader's preset price. That's where cash-secured puts come in as a popular crypto options strategy, because it offers two key benefits. These include the opportunity for crypto traders to acquire assets at their preferred price and the generation of returns upfront in the form of credited put premiums.
Ultimately, cash-secured puts offer a compelling option for risk-conscious crypto traders seeking a potential discounted entry point and upfront income by selling put options on their preferred coins or tokens.
Planning and executing cash-secured puts: a step-by-step guide
If you've done your research and decided that a cash-secured put options strategy aligns best with your trading goals and risk tolerance, here's a step-by-step guide that walks you through key considerations when executing the strategy.
1. Selecting your preferred underlying digital asset
One key thing to remember when executing the cash-secured puts option strategy is that crypto traders must always take the risk of assignment into account. That's why crypto traders should only sell puts for tokens or coins that they wouldn't mind owning a long position of.
2. Choosing an appropriate strike price
The strike price of the put contract being sold should reflect traders' desired purchase price and align with their risk tolerance. Cash-secured put sellers should ultimately weigh the benefits of selling puts with at-the-money strike prices against put contracts with out-of-the-money strike prices.
3. Depositing the necessary capital
Crypto traders executing the cash-secured put options strategy must make sure they have sufficient funds to cover the potential purchase of the underlying asset if the put option is exercised. This can range from depositing more capital to selling existing assets to make sure there's enough capital in the overall trading account.
4. Selling the put and opening a short put position
Once all of these factors are taken into account, crypto traders can proceed to execute the trade by opening a put contract at the preferred strike price and expiry. Once the trade is filled, crypto traders will receive put premiums credited to their account and have a short position for their chosen put contract. If the put contract expires in-the-money, the previously set-aside capital will be used to purchase the underlying asset. Conversely, if the put contract expires out-of-the-money, traders can pocket the put premiums and choose to restart the cash-secured put strategy by selling another put.
Considerations when executing cash-secured puts
Cryptocurrency selection: It's important to choose coins and tokens with sufficient liquidity and option volume to ensure execution and management of the cash-secured put strategy. The last thing you'll want is to miss out on potential gains because of a wide bid-ask spread when attempting to sell the put contract.
Strike price selection: It's key to carefully consider your personal risk tolerance when choosing a strike price for the put contract you're about to sell. An at-the-money strike price offers a better entry point but increases assignment risk, while an out-of-the-money strike price reduces risk but lowers the potential premium gains.
Capital requirements: Make sure you have sufficient capital to cover the potential purchase of the underlying asset and potential margin requirements.
Evaluating the pros and cons of the cash-secured put options strategy
Can't decide if the cash-secured put options strategy is right for you? Here's a handy breakdown of the benefits and drawbacks of executing this popular options strategy in the crypto market.
Benefits | Drawbacks |
|---|---|
Lower entry point | Assignment risk |
Upfront premiums | Opportunity cost |
Reduced impact of volatility | Limited potential returns |
Potential cash-secured put benefits
Lower entry point: Cash-secured puts allow you to acquire crypto at a price below the current market value if the option is exercised.
Upfront premiums: You earn the upfront premium regardless of whether the option is exercised, providing cash flow for further trading opportunities.
Reduced impact of volatility: By hedging against potential price declines and receiving premiums off the high volatility, cash-secured puts offer a high degree of protection in volatile markets when attempting to establish a long position.
Potential cash-secured put drawbacks:
Assignment risk: If the crypto price falls below the strike price, traders are forced to purchase the underlying crypto asset. This could potentially be at an unfavorable price if overall sentiment continues to be bearish.
Opportunity cost: As previously mentioned, cash is set aside to make sure that the risk of liquidation is mitigated. Unfortunately, this tied-up capital used for the cash-secured put limits traders' ability to generate returns elsewhere.
Limited potential returns: As the maximum returns a trader can gain from cash-secured puts are the overall premiums received, crypto traders executing this strategy are ultimately capping their potential returns, even if the underlying crypto's price rises significantly.
Practical cash-secured puts tips and strategies
Risk management techniques
Implementing risk management practices is crucial for mitigating potential losses when executing cash-secured puts. Employing stop-loss orders for your short put position can automatically exit your position if the crypto price falls below a predefined level, limiting potential downside. Conversely, establishing profit-taking targets helps lock in gains if the price moves favorably.
Maintaining emotional composure in volatile markets
Cryptocurrency markets are inherently emotional, and volatility can trigger the emotional decision to make impulsive moves. That's where maintaining one's composure is necessary. With cash-secured puts, since the risk of owning the underlying asset is present, crypto traders must stick to their predefined strategy and avoid reacting to short-term price fluctuations that may incite traders to close the short put position prematurely.
Staying informed
Staying updated on relevant news, market analysis, and community discussions empowers you to make informed decisions about your cash-secured put strategy. By relying on reputable sources and diverse perspectives to gain a well-rounded understanding of market dynamics, crypto traders can better decide when to cut their losses or double down if necessary.
Executing the cash-secured put strategy for your crypto portfolio
Source: TradingView
Now that you're familiar with expiry dates and strike prices, let's explore the planning and execution of a cash-secured put options strategy with BTC options. In this example, we'll be adopting a more aggressive approach by selling a $40,000 BTC put option with an expiry date of 23 February, 2024. In essence, when we open this short put position, it means we'll be buying 1 BTC for $40,000 if it closes below that price at expiry. In exchange for this agreement to buy Bitcoin at the mentioned strike price, selling this put option will grant us about $390 in premiums. This ultimately gives us a margin of safety of about 7%, as Bitcoin prices will have to dip by $3,000 for us to be at risk of assignment.
If BTC prices fail to fall below $40,000 by 23 February, 2024, the out-of-the-money put contract will expire and end up worthless. This means we get to keep our $40,000 in capital that we set aside for the risk of assignment and the $390 in put premiums. Once this position is closed, we're then presented with the decision of either executing another cash-secured strategy by selling another BTC put contract or making other trades with the newfound gains we just made thanks to the put premiums.
In a way, the cash-secured put strategy stated above creates a form of income generation as you're regularly writing puts against the cash position you're holding to earn option premiums. While a sudden price spike might cause you to deploy your capital to purchase the underlying asset, the put's strike price is a price that you were comfortable purchasing BTC at in the first place.
Final words and next steps
Cash-secured puts are a unique tool in any crypto trader's arsenal and can be extremely useful for those seeking to establish a position at a predetermined price while generating passive returns. However, this crypto options strategy isn't without its risks, and requires careful consideration and planning. Before diving into executing cash-secured puts, traders must make sure they have sufficient capital to handle assignments and understand that the options strategy limits overall gains to the total put premiums received.
Wondering what you can do if you're assigned the underlying asset? Make sure to give the covered call strategy a try as it involves writing a call option against the asset you're holding. This ultimately means you're agreeing to sell your asset at a given strike price while earning call premiums along the way. Some veteran options traders call this one-two combination of covered calls and cash-secured puts the 'Wheel' strategy and deem it a method for receiving continuous cash flow in the form of options premiums.
Keen on learning more about crypto options strategies? Check out our guide to options strategies like straddles and collars to begin your options trading journey with us today.
FAQs about crypto cash secured puts
1. Are cash-secured puts risky?
While cash-secured puts offer potential benefits, they carry inherent risks and complexities. This strategy might not be suitable for absolute beginners lacking a solid understanding of crypto fundamentals, options trading concepts, and risk management techniques. It's highly recommended to gain significant experience and knowledge before venturing into this strategy. Consider seeking guidance from a qualified financial advisor to assess your suitability and develop a trading plan.
2. What is the downside of a cash-secured put?
The potential losses for cash-secured puts can be substantial as it involves owning the coin or token at the pre-agreed strike price. As a result, the premium earned is a comparatively small compensation for accepting the large downside risk of owning the asset.
3. Can I use cash-secured puts on other cryptocurrencies besides Bitcoin and Ether?
Yes, cash-secured puts can be used with various cryptocurrencies, but remember to choose assets with sufficient liquidity and option volume to ensure smooth execution and management. Carefully research the specific characteristics and risks associated with each cryptocurrency before making your selection.
4. How much capital do I need to execute cash-secured puts?
The capital required depends on the chosen strike price and the underlying asset's value. You'll need enough to cover the upfront premium and the potential purchase of the asset if the option is exercised. Always make sure you have sufficient capital to manage your positions effectively.
5. What are some alternative strategies for acquiring crypto at a lower price?
Several alternative long-term trading strategies exist, such as dollar-cost averaging. Each strategy offers different risk-reward profiles, and the best approach depends on your individual goals and risk tolerance. Explore and research these options carefully before making any trading decisions.
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