The Setup: How to Construct a Cash-Secured Put Trade

Five decisions, every time

A cash-secured put trade is not a single decision. It is five decisions wearing one ticket. The seller who treats it as one — "I'll sell a put on XYZ" — is making four implicit decisions without noticing. The seller who treats it as five gives each one its own rule.

The five decisions are:

1. The underlying.
2. The strike.
3. The days-to-expiration (DTE).
4. The position size.
5. The exit plan.

This piece walks through each, then puts them together in a worked example. The point is not to prescribe specific numbers. It is to make every component explicit so that a beginner can build their own rulebook on top.

1. Underlying selection

The first decision is the only one that can save you from every later one. If the underlying is wrong, no amount of clever strike selection will fix it.

A defensible underlying for cash-secured put selling has a few features.

• You are comfortable owning it at the strike. This is the test that matters most. Cash-secured puts can result in assignment. If assignment would be unwelcome, the trade is wrong from the start.
• Liquid options. Wide bid-ask spreads on the option destroy the seller's edge. A general guideline is that the spread should be a small fraction of the credit; if you are giving back 20% of the premium just to enter, the math gets ugly fast.
• A balance sheet you can read. Premium harvesting works best on businesses whose downside scenarios are bounded. Highly speculative names with binary outcomes (small-cap biotech, early-stage tech with no profitability) compound the risk in the wrong direction.
• No imminent special events you are not pricing. Earnings, FDA dates, court decisions, M&A votes — these are not disqualifiers, but they require event-specific rules.

If your universe filter is "I would buy this name at the strike for the long term", you have already done more risk management than most retail sellers do all year.

2. Strike selection

Strike selection has two common framings. Most systematic sellers use one consistently and adjust the other only when it conflicts.

By delta. A target delta band (commonly 0.15 to 0.30 for short puts) defines the strike. Delta is volatility-aware: when IV rises, the same delta sits further from spot, because the market is pricing in a wider expected range. This is generally a good property — it means your strike adjusts with the regime instead of staying fixed in a vacuum.

By percent out-of-the-money. A target distance from spot (commonly 5-15% OTM, depending on the underlying's typical volatility). This is volatility-blind: it stays where you put it whether the market is calm or chaotic. The benefit is simplicity; the cost is that it can put you too close to the money in a high-IV regime or unnecessarily far in a low-IV one.

Most systematic sellers pick delta as the primary handle and use percent-OTM as a sanity check.

There is a third lens that matters more than either: the historical floor. Where has the underlying actually moved through similar conditions? If a strike is 8% below spot and the underlying has moved 10% or more in 30% of recent comparable windows, the strike is not as defensible as the percent suggests. Statistical buffers should be corroborated by demonstrated behaviour.

3. Days-to-expiration

DTE controls three things at once: how much premium you collect, how much time decay works for you per day, and how exposed the position is to gamma near expiry.

The standard premium-harvesting band is 30 to 50 DTE at entry. Inside that range:

• Time decay (theta) is meaningful but not yet violent.
• Gamma (the rate at which delta changes) is moderate, so the position is not whipsawed by small underlying moves.
• There is enough room to manage the trade before expiry pressure kicks in.

Shorter DTEs (7-21) accelerate decay and the seller's "per-day yield" — but they also accelerate gamma, which means a small move against the position quickly becomes a big move in P&L. Longer DTEs (60+) collect more total premium but at a lower per-day rate, and the contract sits open for longer, which raises exposure to surprises.

The decision is not "which DTE is best"; it is "which DTE matches the rest of your rulebook". A 45 DTE entry combined with a 21 DTE time stop is internally consistent. A 7 DTE entry without a defined exit is not.

4. Position sizing

This is the decision retail sellers most often skip. The thinking goes: "I have $9,000 in my account, the put is $90 strike, that is one contract, done." That is sizing by what fits, not by what is sensible.

A more disciplined frame:

• Collateral. A short cash-secured put requires the broker to set aside strike × 100 in cash. A $90 strike requires $9,000 per contract. That cash is locked until the position closes.
• Portfolio concentration. A single position should generally not represent more than a modest percentage of total premium-harvesting capital. Common ranges are 5-15% per position, depending on the seller's overall portfolio plan.
• Sector concentration. Two positions on different tickers in the same sector are not two positions; in a sector drawdown they correlate. Sizing should account for that.
• Reserve capital. A book that uses 100% of available capital has no room to react if a position needs rolling or if another high-quality setup appears. Most disciplined sellers operate at meaningfully less than full utilisation.

The right sizing is the size at which a worst-case outcome on the position would be unpleasant but survivable, not catastrophic.

5. Exit plan

Every trade needs three exit branches, defined before entry.

Profit target. Many systematic sellers close at 50% of max profit, which historically captures most of the time-decay benefit without holding through the gamma-heavy final stretch. Some use 25-35% for shorter-dated contracts that decay faster in percentage terms.

Time stop. If the profit target has not triggered by, say, 14 DTE remaining on a 45 DTE entry, close anyway. The remaining premium is small and the gamma risk is rising. Holding a near-expiry short put for the last few dollars is one of the most consistently bad habits in retail premium harvesting.

Broken thesis. If the underlying breaks below the historical floor that justified the strike — not just dips, but breaks — close regardless of P&L. The trade you opened was a "strike sits below demonstrated downside" trade. Once the underlying is below the strike's historical floor, that trade no longer exists. You are now in a different, worse trade you would not have entered.

The discipline is that all three rules are unconditional. The reason to write them down is so they get followed when the screen is uncomfortable.

A worked example

Numbers below are illustrative, not a recommendation.

Suppose XYZ is a large-cap consumer staples name trading at $100. It has weekly and monthly options with tight bid-ask spreads, no upcoming earnings inside the next 30 days, and a multi-year history of moving inside a roughly 10% band over any 30-day window.

A systematic seller might construct the trade this way:

• Underlying. XYZ passes the "would I own this at the strike?" test. Liquidity is good. No event risk inside the window.
• Strike. Target 0.20 delta. Looking at the chain, the $92 strike is closest. That sits 8% below spot. Historical 30-day moves on XYZ have stayed inside 8% in roughly 85% of comparable windows over the last several years.
• DTE. Pick the monthly cycle 45 days out.
• Premium. Suppose the $92 put bids at $1.20. The seller collects $120 per contract, against $9,200 of secured collateral. That is a return on margin of about 1.3% over 45 days, or roughly 10% annualised if rolled consistently — useful, not extraordinary.
• Sizing. The seller's plan caps any single position at 10% of premium-harvesting capital. With a $150,000 sleeve, that allows up to $15,000 in collateral, or one $92-strike contract with room to spare.
• Exit plan. Close at 50% of max profit ($0.60 buy-back). Time stop at 14 DTE remaining. Broken-thesis exit if XYZ closes below $89 (the floor the historical-move analysis identified) at any point.

That is the whole trade. Five decisions, each with a written rule, each independent of the others. The next contract — on a different name, a different strike, a different cycle — gets the same five decisions applied the same way.

How StratosIQ scores each decision

StratosIQ does not make the five decisions for you. It scores the inputs to each one so that you can apply your own rule to a consistent output.

• Underlying. Strike and Patrol both pre-filter to liquid US equities and ETFs with active option markets and tradeable spreads. The seller still applies their own "would I own this?" test.
• Strike. The Sigma-Distance component scores how far the strike sits from spot in standard-deviation units, and ShieldIQ overlays a historical-move floor with a Fortified / Safe / Constrained / Exposed buffer status.
• DTE. The DTE component scores how the contract's days-to-expiration sit inside the engine's calibrated band.
• ROM. Return on margin is scored as a component so that the seller can see whether the capital is being used efficiently, not just whether the credit looks big in dollar terms.
• Composite. The six components collapse to a single 0-10 score that lets the seller compare across underlyings and across days with the same yardstick.

The exit plan stays with the seller, because the exit plan should apply across the whole book, not be sourced from any single screening tool.

StratosIQ is a quantitative analysis model. It applies mathematical algorithms to publicly available market data and produces numerical scores. It does not provide financial advice, investment advice, or personalised recommendations. Users are solely responsible for all trading decisions.