Getting Paid to Buy Stocks You Already Want: Cash-Secured Puts on PayPal

The One-Sentence Version

A cash-secured put is a promise to buy a stock you already want at a price you already like, in exchange for an upfront premium. If the stock hits your price, you get the shares. If it does not, you keep the premium. Both outcomes have to be acceptable to you. That is the entire framework.

A Concrete PayPal Example

Assume PayPal trades at $45 and I already own shares. I am open to buying more, ideally at a discount. $45 is fine, but $43 would be better.

I sell one June 12 expiration $43 strike put. One contract represents 100 shares. Suppose the premium is $0.80 per share, so I collect $80 upfront. That $80 is mine no matter what happens next.

Two possible outcomes:

Scenario 1: PayPal closes below $43 at expiration I buy 100 shares at $43. Subtract the $80 premium and my effective cost basis is $42.20. I get my entry price, with a small discount on top.

Scenario 2: PayPal closes above $43 at expiration No shares change hands. I keep the $80. I tied up $4,300 in cash collateral for roughly a month and earned $80, which annualizes to about 22%.

Either outcome is acceptable. The strategy only works when both outcomes are something you actually want.

When to Use It and When Not To

I do not run cash-secured puts on every name. Three conditions have to hold.

1. The underlying is already at or below fair value. The strike has to be a price where you genuinely want to own the stock.
2. You are willing to add to the position. If you would not buy more shares at the strike, do not sell the put.
3. You have cash you can lock up. The full strike times 100 shares is reserved until expiration or assignment.

PayPal meets all three for me. The valuation work behind that view is in PayPal's Triple Scenario.

The Mistakes People Make

A few traps catch people who are new to this.

The first is selling puts on stocks they don't actually want. A 22% annualized return looks attractive, so beginners write puts on names with shaky fundamentals. When they get assigned, they regret it. If you would not be happy owning the stock at the strike, do not sell the put.

The second is strikes set too far out of the money. A $35 strike on a $45 stock pays so little premium that the return on capital becomes trivial. A strike one step below current price usually gives the best balance of premium and assignment probability.

The third is treating it as a directional bet. Cash-secured puts are not a way to bet on the market going up or down. They are an entry-price negotiation tool. Stop trying to predict price and focus on where you want to own the stock.

What I Take Away

The reason I wish I had learned this 25 years ago is simple. Buying good companies at the prices you want requires patience. Patience becomes a lot easier when you are getting paid to wait.

PayPal is one of the names where I think this tool fits well right now. The stock is already cheap, so being assigned is a fine outcome. Not being assigned and keeping the premium is also a fine outcome. The strategy works only when you can honestly say that about both branches of the tree.