it's the hedging effect. Options & their underlyings are nearly always sold in pairs, trios or quads. This smooths price progression while setting limits.imho the quality of the underlying stock is numero uno consideration, not only for puts but for calls as well. When i was very young doing options for the first time a derivative trader told me "You have to like the stock." I still totally believe this.I'm putting much more weight into the underlying stock rather than focusing on the options premium when selling naked puts.
do y'll remember metatheta? he used to post up wizard iron plays in the days prior to earnings announcements ... then he'd casually ask on here, in the forum, if anybody knew what kind of company his underlying stock was! there are many short-term iron strategies that go like this. It's a different approach from using options to enhance return in a lifetime portfolio.
for a lifetime portf, imho it's better to forego higher premiums if it means owning or risking to own dodgier stocks. The ideal candidate is the quality stock with enough volatility to generate decent premiums. GOOGL types, maybe AAPL. There are not very many of those in canada. Most canadian companies that do have decent options have US options whose markets are bigger & more flexible than montreal (tck, pot, eca, cnq.)puts are so alluring to sell ... all that free money ... oh, my ...I've also scaled back the amount of margin (absolute and relative %) that my naked puts would put met out if exercised.
but resist. The trap is the kind of global market collapse we saw in '08/'09. All accounts plummet 30-40-50%. Available margin vanishes. Puts get exercised but client has no margin, therefore has to sell the assigned shares at market price. Suppose market is $36 while 10 puts have suddenly been assigned to client at $56. Right away he has a $20,000 loss. Multiply that by 8 or 10 holdings. Pandemonium.
in 2008 i had a good friend working at a major options broker. He's the person who gave me the simple formula to determine if an option is at risk of early assignment. This formula has been very popular here in cmf forum.
back to november 2008: my friend said his firm was losing longtime clients left, right & centre. He said those quadruple iron plays were blowing up, because extreme markets will destroy the hedges. He said clients who had relied on those kinds of strategies for decades were being forced out of their accounts with margin calls.
moral of the story: one should keep well under one's buying power. Especially in upcoming donald trump markets, when we can expect wild crazy unstable news to be the new norm.