How to Sell Cash Secured Puts on Charles Schwab for Passive Income
If you’re interested in generating passive income through options trading but don’t know where to start, selling cash secured puts might be your perfect entry point. In this detailed guide, I’ll walk you through the process of selling cash secured puts on the Charles Schwab platform using real examples. Whether you prefer steady dividend ETFs or high-volatility growth stocks like Tesla, this tutorial covers everything you need to know to get started with confidence.
What Are Cash Secured Puts?
Before diving into the trading platform and strategies, let’s clarify what cash secured puts (CSPs) are. A cash secured put is an options strategy where you sell a put option while setting aside enough cash to buy the underlying stock if the option is exercised. Essentially, you’re agreeing to buy the stock at a specific price (strike price) if the market price falls below that level before the option expires.
You get paid a premium upfront for selling the put — think of it as getting paid for the option buyer’s right to sell the stock to you at the strike price. If the stock stays above the strike price, the option expires worthless, and you keep the premium. If it falls below, you buy the stock at the strike price, which you were prepared for since you had the cash ready.
Why Sell Cash Secured Puts?
Selling CSPs can be a great way to generate consistent income while potentially acquiring stocks you want at a discount. Here’s why this strategy appeals to many investors:
- Generate Premium Income: You collect premium income every time you sell a put.
- Potential to Buy Stocks at a Discount: If the stock price falls, you buy shares at a strike price lower than the current market price minus the premium received.
- Limited Risk with Cash Collateral: Because you keep cash aside to cover potential stock purchase, you avoid margin calls.
- Flexible Timeframes: You can sell puts weekly, monthly, or at other intervals depending on your risk tolerance and market outlook.
Step-by-Step Guide to Selling Cash Secured Puts on Charles Schwab
Accessing the Options Trading Section
Let’s start by logging into Charles Schwab’s web platform. While Schwab offers mobile and tablet apps, the web app provides the easiest interface for options trading.
- Navigate to the Trade Tab: At the top left of the dashboard, find and click the “Trade” tab.
- Select Options Chains: Under the options dropdown, click “Chains.” This will bring up the options chain for any stock or ETF you want to trade.
Note: The interface may change over time, so if you’re watching this guide years later, expect minor differences.
Choosing Your Underlying Asset: ETF vs. High-Volatility Stock
I’m using two examples to illustrate the difference in potential premiums:
- Low Volatility Dividend ETF: SCHD (Schwab U.S. Dividend Equity ETF)
- High Volatility Growth Stock: Tesla (TSLA)
Example 1: Selling Cash Secured Puts on SCHD (Dividend ETF)
Step 1: Pick an Expiration Date
I recommend starting with an expiration date about 30 to 40 days out. For this example, I’m using October 21st, 2022, which is roughly 37 days from today.
Step 2: Select the Strike Price Using Delta
Delta tells you the likelihood of the option being exercised. We aim for a delta of around -0.30 (or 30). For SCHD, this means selecting a strike price near $70 (the underlying is trading at $71.60 at the time).
Step 3: Selling to Open
You’ll “sell to open” the put option contract, meaning you’re writing the contract and agreeing to buy the shares if exercised.
Step 4: Calculate Premium and Collateral
- Each contract covers 100 shares.
- At a $1.20 premium per share, one contract earns $120.
- For 14 contracts (with $100,000 in your account), you need $98,000 collateral ($70 strike × 100 shares × 14 contracts).
- Total premium collected = $1,680.
Step 5: Understand Your Cost Basis
If exercised, you pay $70 per share but subtract the premium received. So effectively, your cost basis is $68.80 per share ($70 – $1.20).
Step 6: Potential Returns
- Risking $98,000 to make $1,680 in 37 days.
- Simple calculation gives a 1.71% return for 37 days.
- Annualized, this is approximately a 20.57% yield — much higher than typical savings accounts.
Example 2: Selling Cash Secured Puts on Tesla (High Volatility Stock)
Step 1: Same Expiration Date
We use the same October 21st, 2022 expiration date for consistency.
Step 2: Find Strike Price for -0.30 Delta
Tesla’s strike price around a 30 delta is $278.33, with Tesla’s stock price fluctuating more wildly than SCHD.
Step 3: Calculate Premium and Collateral
- One Tesla contract premium is about $12.35 per share.
- For one contract (100 shares), premium = $1,235.
- Collateral needed = $27,833 per contract.
- With $100,000, you can afford about 3 contracts.
- Total premium = $3,705.
Step 4: Evaluate Risk and Reward
Tesla’s premium is much higher due to volatility, giving a larger payout but requiring substantial collateral per contract. The potential for stock price swings means higher risk but also greater reward.
Key Concepts to Remember When Selling Cash Secured Puts
Collateral Requirement
You must have enough cash in your account to cover buying the shares if exercised. This is the “secured” part of cash secured puts.
Premium Income
Premiums vary based on volatility, strike price, and expiration. Higher volatility stocks pay more premium but carry more risk.
Delta
Delta helps select strike prices with a balance of premium income and risk. A 30 delta put means about a 30% chance the option will be exercised.
Expiration Dates
Longer expirations usually pay higher premiums but tie up your capital for longer. Shorter expirations require more frequent monitoring.
Risk Management
You’re risking the capital set aside to buy the shares, so only use this strategy with stocks or ETFs you want to own long-term.
Tips for Maximizing Income with Cash Secured Puts
- Start with ETFs or stable stocks to gain comfort before moving to volatile stocks.
- Use delta to select strike prices that balance premium and risk.
- Choose expirations around 30-45 days for consistent monthly income.
- Keep cash ready to cover the strike price if exercised.
- Diversify across different underlying assets to manage risk.
- Monitor the positions regularly to adjust or close if needed.
Platforms for Selling Cash Secured Puts
Charles Schwab is a great place to start, especially with its user-friendly web platform. But you can also sell cash secured puts on:
- Robinhood
- WeBull
- Fidelity
- TD Ameritrade
- Think or Swim (by TD Ameritrade)
All these platforms have options trading capabilities; pick one you’re comfortable with.
What Happens if the Stock Price Drops Significantly?
If the stock price plunges below your strike price, the put option will likely be exercised. You’ll be obligated to buy the shares at the strike price, potentially facing losses if the stock keeps falling.
However, since you wanted to own the stock anyway, this might not be a bad outcome. Plus, the premium received cushions the purchase price.
Final Thoughts
Selling cash secured puts is a straightforward way to generate passive income and potentially buy stocks at a discount. Using Charles Schwab’s platform, you can easily find options chains, pick strike prices, and sell puts with just a few clicks.
Whether you prefer the steady income from dividend ETFs like SCHD or want to capitalize on volatility with stocks like Tesla, this strategy can fit your investing goals. Just remember to:
- Always have enough cash collateral.
- Understand the risks involved.
- Only write puts on stocks or ETFs you’re comfortable owning.
If you stick with this strategy and do your homework, cash secured puts can become a reliable income stream in your portfolio.
Frequently Asked Questions (FAQ)
Is selling cash secured puts risky?
Yes, there is risk if the stock price falls well below the strike price. You’ll have to buy shares at the strike price, which may be higher than the market price.
How much money do I need to sell cash secured puts?
You need enough cash to cover the strike price times 100 shares per contract. For example, a $70 strike price requires $7,000 per contract.
Can I sell cash secured puts on any stock?
Most liquid stocks and ETFs with options chains support this strategy. Avoid illiquid or speculative stocks to reduce risk.
How often can I sell cash secured puts?
You can sell weekly, monthly, or longer-term puts depending on your preference and the available expirations.
With this comprehensive guide, you’re ready to start selling cash secured puts on Charles Schwab and generate passive income while managing risk effectively. Happy trading!
