What is rule one puts?
- Rule one puts use cash-secured puts to set a buy price below market value.
- You collect premium income immediately, even if the option never gets exercised.
- The strike price is your target entry, chosen with a big margin of safety.
- If the stock falls to your strike, you buy shares at that discount, not the market price.
- This strategy turns patience into profit and cushions your entry against drops.
What is rule one puts?
Rule one puts is Phil Town's stock buying strategy. You sell a cash-secured put on a stock you want to own. You set a strike price far below market, and that gap is your margin of safety.
You get paid a premium for selling that put, and options are the vehicle. If the stock never drops to your strike, you keep the cash. If it does, you buy at your set price. You are the insurer, unlike a protective put's buyer who pays out of doubt.
How a cash-secured put works
A cash-secured put means you have enough cash to buy the shares if assigned. You sell a put option with a strike price, say $50, when the stock trades at $60. You collect a premium, maybe $2 per share.
If the stock stays above $50, the option expires worthless and you keep the $200 premium. If it falls below $50, you are assigned shares. You pay $50 each, but your real cost is $48 after the premium.
You must have the cash ready. That is why it is called cash-secured. No margin. Pick a strike with a real margin of safety, 20% to 30% below what the business is worth. Your window is the option's expiration, and you can sell a fresh put when one closes.
The margin of safety edge
The real power of rule one puts is the cushion you build in. You choose a strike price that is a big discount from the stock's value. You get paid to wait for that price to hit.
If the stock drops, you buy with a built-in gain. If it never drops, you still earn premium income. That is a win-win. Most investors chase stocks up. You let the market come to you and deliver shares at a price you love.
Remember, this works only with quality companies. You must know the business is worth more than your strike price. If the stock drops for a real reason, you might be buying a falling knife. Do your homework first.
The risks that can turn rule one puts against you
A rule one put upgrades the limit order you already use. A limit order sets your price and pays you nothing to wait. The put sets the same price but pays premium for your patience. Same goal, one pays you.
The painful risk is assignment. If the stock crashes through your strike, you own it, and it can keep falling. Cheap turns into a paper loss fast. So you only sell puts on quality businesses you would gladly own lower.
There is a quiet cost too. Your cash sits locked up as collateral while you wait. It cannot earn, grow, or rescue you elsewhere. The premium you collect is your wage for giving up that freedom.
Rule one puts fail when you skip the homework. A blowup gaps the price through your strike. Size each put so a single loss never hurts your plan. The cushion works only if the company is solid.