Understanding Moneyness for Cash Secured Put Options
Moneyness is an important concept for traders employing cash secured put strategies. Here is how it applies:
A cash secured put involves selling put options on an underlying stock to collect premium income, while setting aside enough cash to potentially buy the stock at the put strike price if assigned.
In the Money (ITM)
For puts, an ITM strike price is below the market price of the stock. If exercised when ITM, the trader would buy the shares below market value.
At the Money (ATM)
An ATM put strike is very close to the actual stock price. Premiums tend to be lower compared to ITM puts.
Out of the Money (OTM)
For puts, OTM means the strike price is higher than the share price. Traders targeting less risky cash secured put trades usually sell OTM puts. There is a lower chance of being assigned the stock, but also lower premiums collected.
Assessing moneyness is key for cash secured put traders seeking to balance income versus assignment risk on individual trades. The relative moneyness also impacts variables like premium pricing. Understanding this concept allows for better informed trade decisions.