You've got a stock you'd own and a strike you'd pay (Lesson 3). Now — and only now — the premium. A fat premium is not automatically a good trade; it has to survive three quick checks. Then you size the position so the one outcome that matters, assignment, can't hurt you.
Three tests before you sell
Using a running example — a stock at $100, the 30-day $90 Put for $3.00:
1. The breakeven test
Breakeven = strike − premium = $90 − $3 = $87. Would you be happy owning the stock at $87? If not, the premium is irrelevant — you've agreed to buy something at a price you don't like.
2. The return-on-capital test
Return on capital = premium ÷ cash secured = $300 ÷ $9,000 = 3.3% in 30 days, which annualizes to roughly 40%. Treat the annualized figure as a speedometer reading, not a promise — you won't repeat it every month, and it says nothing about the downside. The Cash-Secured Put calculator runs these for your own numbers.
3. The downside test
The one most traders skip. What happens if the stock drops 20%? 50%? At $70 you're assigned at $90, holding a $1,700 unrealized loss — a paper loss that only becomes real if you sell — against the $300 you collected. The premium looked like $300 of income; the risk was nearly six times that.
The whole trade on one line:
| Metric | Formula | Result |
|---|---|---|
| Premium received | $3.00 × 100 | $300 |
| Cash secured | $90 × 100 | $9,000 |
| Breakeven | $90 − $3.00 | $87.00 |
| Max profit | premium | $300 |
| Return on capital | $300 ÷ $9,000 | 3.3% (30 days) |
| Annualized | 3.3% × (365 ÷ 30) | ≈ 40% |
| If assigned at $70 | ($87 − $70) × 100 | −$1,700 |
Size for the assignment, not the premium
This is the most important risk rule in the whole strategy: size every Put as if you'll be assigned — because eventually you will. One $90 contract is not a $300 trade; it is a $9,000 commitment to buy stock. Sell three and you've agreed to spend $27,000. Ask whether you could take delivery of every open Put at once, comfortably, and still sleep.
Hidden concentration
Selling Puts on five different tech names and calling it diversified — they fall together. Watch sector overlap, correlation, and how many Puts expire the same week. And keep "Cash-Secured" literal: the moment you sell more Puts than your cash can cover, you're trading Naked Puts on margin and have left this strategy entirely.
Key takeaways
- Run three tests before selling: breakeven, return on capital, and the downside if it falls hard.
- Annualized return is a comparison aid, not a promise — and it ignores the loss.
- Size for the assignment: one contract is a 100-share commitment, not a premium ticket.
- Keep a reserve and avoid correlated stacks, so a market drop can't assign you into trouble.