How to Potentially Buy Lower with a Cash Secured Put: A Case Study of TUTU Company

The cash secured put strategy can be used to potentially buy the underlying stock at a lower price.

Today we'll take a hypothetical stock TUTU as an example and look at how this strategy could be used in real trading.

【Strategy Introduction】

1. Construction of the Strategy

A cash secured put is an option trading strategy in which a trader sells a put option of a specific underlying asset and receives a premium in exchange for the obligation to buy that asset at the strike price if the put option is exercised.

2. Practical Scenarios

Generally, traders use a cash secured put for two reasons. One is that the trader expects to earn a premium. The other is that the trader expects to buy the underlying stocks at a lower price. A well-known example of this purpose is the cash secured put conducted by Warren Buffet, who managed to buy Coca-Cola at a lower price.

【Case Study-TUTU】

Suppose Bob followed TUTU company's price movements on moomoo for a long time. After its earnings release, Bob used the charting tools to draw the support and resistance levels and found the stock experienced a huge retracement, hitting its overall upward trendline.

After waiting for half a month's rallies, on July 22, when the stock closed at US$125.35, Bob decided it was time to act.

If he had bought the 100 shares of the stock directly, it would have cost him $12,535. On second thought, he decided to conduct a cash secured put strategy of the stock with a strike price lower than the current share price.

After setting up this strategy, he could
1) receive a premium after selling the option;
2) buy TUTU stock at a lower price should the option be exercised.

1. Sell to Open：

Bob sold a put of TUTU at $2 with a strike price of $110 that expired on 22/02/2023.
Net Premium Received Per Share = $2.
Hence,
Total Gain of Short Put= Premium Received Per Share * Multiplier * Contract Size = $2 * 100 * 1= $200.

2. Strategy Analysis

3. Pros & Cons of the Strategy

【Comparison】

1. Cash Secured Put VS. Covered Call

Both Cash Secured Put and the Covered Call involve selling options contracts, but they are different in terms of strategy objectives, directional bias, and margin requirement.

2. Cash Secured Put VS. Short Put

Both cash secured put and short put are options trading strategies that involve selling a put option, but they differ in terms of objective, risk, and margin requirements.

3. Risk Management

When using this strategy, you should bear in mind that it may not be applicable to all underlying assets and any investment involves risks.
Risk management is extremely important for traders when conducting this strategy, as it is possible for the stock price to drop far below the strike price, resulting in substantial losses.
Some traders may set a stop-loss order at a predetermined price, which may help to limit their losses by automatically closing out the position if the price of the underlying asset falls below a certain level. Some may also use options spread for risk hedging.

Risk Statement
Options trading entails significant risk and is not appropriate for all customers. It is important that investors read the Characteristics and Risks of Standardized Options (https://j.us.moomoo.com/00xBBz) before engaging in any options trading strategies. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount. Supporting documentation for any claims, if applicable, will be furnished upon request. Moomoo does not guarantee favorable investment outcomes. The past performance of a security or financial product does not guarantee future results or returns. Customers should consider their investment objectives and risks carefully before investing in options. Because of the importance of tax considerations to all options transactions, the customer considering options should consult their tax advisor as to how taxes affect the outcome of each options strategy. This article is for educational use only and is not a recommendation of any particular investment strategy. Content is general in nature, strictly for educational purposes, and may not be appropriate for all investors. It is provided without respect to individual investors’ financial sophistication, financial situation, investment objectives, investing time horizon, or risk tolerance. You should consider the appropriateness of this information having regard to your relevant personal circumstances before making any investment decisions. All investing involves risks. Moomoo is a financial information and trading app offered by Moomoo Technologies Inc. In the U.S., investment products and services on Moomoo are offered by Moomoo Financial Inc., Member FINRA/SIPC.