Selling a cash-secured put means that you sell or "write" a put option against shares that you do not yet own, but would like to own. In an IRA account the short put must be cash secured, which means that you must have enough cash in your account to buy the shares of they are put to you. Not only must you have enough cash in your account, but during the whole time you are short that put, the cash will be frozen in your account and you cannot use it for any other trade or as collateral for any other option position.
Typically when the IRA investor sells cash secured puts he or she is either hoping to be able to buy a stock for a cheaper price than that at which it is currently trading, or he or she is interested in generating extra income via the sale of the option premium and sells a put at a price where he or she does not expect to be assigned the stock. If the strike price of the option sold is lower than the current price of the stock, the investor would normally hope that the option expires worthless with the stock price above the strike price of the option.
In this case the investor will keep the premium received as income. Let's see how this could work with an example. Let's say we have enough cash to buy shares of Apple Inc. They must be nuts! So why doesn't every one do this? Well, a lot of people do. But there are risks too. Was it worth it? If we have consulted the Almanac and we don't like the look of our prospects, we could limit our risk by entering into a spread. How does this work? Lets go back to the options table and check out some more put prices.
Astute readers will perhaps see where the danger lies here. The problem here is that you could also wipe your entire account out completely if you get overextended. It would not even necessarily take an earthquake or a terrorist attack.
It could just be a generalized world wide economic malaise that affects all high-flying stocks, or something that no one ever expected. It could just be a failure to beat earnings estimates. I am long AAPL.
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