A cash-secured put involves selling a put option while setting aside enough cash to purchase the underlying stock if the option is assigned. This strategy generates premium income and is used by investors who are willing to buy the stock at the strike price. It is considered a bullish to neutral strategy, as the seller profits when the stock stays above the strike price and the put expires worthless.

The key formulas are: Cash Required = Strike Price x 100 x Contracts. Max Profit = Premium x 100 x Contracts (if the put expires worthless). Breakeven = Strike Price - Premium. Max Loss = (Strike Price - Premium) x 100 x Contracts (if the stock goes to zero). The annualized return is: (Premium / Cash Required) x (365 / Days to Expiry) x 100.

For example, if you sell 1 put contract at a $95 strike for $3.50 per share with 30 days to expiry when the stock is at $100, you need $9,500 in cash collateral and collect $350 in premium. Your breakeven is $91.50, your return on cash is 3.68%, and your annualized return is 44.81%. If assigned, your effective cost basis is $91.50 per share, a 8.50% discount to the current stock price. This makes cash-secured puts an attractive way to enter a position at a lower price while earning income.