CSP Example

This walkthrough follows a single Cisco (CSCO) position through a complete wheel cycle — selling puts, taking assignment, then selling covered calls until the stock is called away. Every number reflects real option mechanics; no details are glossed over.

The Setup

You’re managing a $200K portfolio with $50K earmarked for options. You have $6,000 available for a new position. CSCO is trading at $58, and you’d be happy owning it at $55 or below — roughly a 5% discount to the current price. That price level aligns with the $55 strike, which is where this trade lives.

Months 1–2: Collecting Premium

Month 1 — April $55 Put. You sell one CSCO Apr $55 Put for $0.72, collecting $72. CSCO stays above $55 through expiration. The put expires worthless; you keep the full premium.

Month 2 — May $55 Put. You roll the trade forward, selling the May $55 Put for $0.65, collecting $65. Same outcome — CSCO holds above $55, put expires, premium is yours. Running premium collected: $137.

graph LR
    A["Months 1-2:\nSell puts\n$137 premium"] --> B["Month 3:\nAssigned at $55\nEffective cost: $52.83"]
    B --> C["Months 4-6:\nSell covered calls\n$230 premium"]
    C --> D["Called away at $56\nTotal profit: $587"]
    style D fill:#22c55e,color:#fff

Month 3: Assignment

You sell the June $55 Put for $0.80, bringing total premium collected to $217. Then CSCO reports disappointing earnings during a broader market selloff, and the stock drops to $52.40 at expiration. The put is in-the-money — you’re assigned 100 shares at $55.

Your effective cost basis is $55.00 minus $2.17 in total premiums received, landing at $52.83 per share. With the stock at $52.40, you’re down about $43 from your effective cost — not the $560 loss you would have faced buying at $58 and holding through the drop.

What If It Kept Falling?

If CSCO continued lower, you’d keep selling covered calls at lower strikes to further reduce your cost basis over time, or you’d evaluate whether the thesis had broken. The premiums collected along the way provide a real cushion, but they don’t eliminate downside risk if the stock falls sharply. Position sizing matters: with 100 shares at $55, only $5,500 of your $50K options budget is deployed, leaving room to manage the trade.

Months 4–5: Shifting to Covered Calls

With 100 shares on the books, you pivot from selling puts to selling covered calls. The $55 strike is the natural target — that’s where you were willing to sell the stock anyway.

Month 4 — July $55 Call. You sell the Jul $55 Call for $0.85. CSCO climbs to $53.50 at expiration — below $55 — so the call expires worthless. You collect $85 and still own the shares. Effective cost basis drops to $51.98.

Month 5 — August $55 Call. You sell the Aug $55 Call for $0.70. CSCO reaches $54.80 at expiration — still below $55. Call expires worthless, another $70 in premium. CSCO also pays a $0.40 dividend during this period, adding $40. Running total across all premiums and dividends: $412.

Month 6: Called Away

You sell the September $56 Call for $0.75 — a slightly higher strike to give the stock room to run while still capturing upside. CSCO climbs to $57.50. The call is in-the-money; your shares are called away at $56. You sell 100 shares for $5,600, realizing $100 in stock appreciation above your $55 assignment price.

Final Accounting

Category	Amount
Put premiums (3 months)	$217
Call premiums (3 months)	$230
Dividend	$40
Stock appreciation ($55 → $56)	$100
Total profit	$587

Capital deployed: $5,500 (100 shares × $55 strike, cash-secured)
Holding period: ~7 months
Return on capital: 10.7%
Annualized: ~18.3%

The trade never required buying CSCO at $58. You set your price ($55), got paid to wait, absorbed a drawdown at a cushioned cost basis, and exited at a profit despite the stock never recovering to its original price.