A put option in which the writer deposits an amount equal to the strike price of the put into an account in case the option is exercised. For example, if one writes a put for 100 shares with a strike price of $10, the writer agrees to place $1,000 into an account and does not use that money for anything. In a put option, the writer agrees to buy the underlying asset from the holder at the agreed-upon strike price should the holder exercise the option. Securing the put with cash reduces the risk to the holder that the writer will be unable to meet the obligations of the contract.
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A put for which the writer deposits an amount of cash equal to the option's exercise price. For example, the writer of a put option on 100 shares of Sears stock at $35 per share would deposit $3,500 because the writer has agreed to buy $3,500 of Sears common stock if the put is exercised. The funds for a cash-secured put may be placed in short-term income-earning securities such as Treasury bills.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.