From that description you're probably asking yourself why anyone would ever sell puts -- good question. However, I think that selling puts makes great sense for people who understand the strategy and tend to like to purchase stocks on dips.

Although many consider the sale of options to be a risky endeavor, the two strategies I will discuss in this post are both "covered" -- meaning, the risk is limited. In this strategy, the key risk-management factor is having the cash in case you are "put" (having to buy the stock at the stated price). For example, if you were to sell the aforementioned Google $450 puts you would have $45,000 in your account in case you were put the 100 shares at $450.

While Google may not be a good example for these type of strategies for most investors because $45,000 would be way too much to risk on a single trade, even with a lesser amount the question remains, why would anyone want to take this risk? Simply put, it's a great way to average into stocks and build up your account in the interim.

For example, lets take a look at Lear Corp. (NYSE: LEA) -- a company that recently rejected Carl Icahn's bid for the company because pretty much all the "smart money" in the stock believes a valuation above $50 per share is justified. Even if I think the company is worth $60 per share, I would probably be hesitant to purchase shares as the stock is up almost 10% on the week. Therefore, I might want to sell the September $40 put options for $2.10 per share/contract.

In this situation, a couple of things can happen:

• If the stock does indeed pull back and I am "put" the stock at $40 (I have to buy it at $40), my cost basis in the stock is only $37.90 (capital committed less premium received). That is, the stock price would have to drop below $37.90 before I incur any losses.
• If, on the other hand, the stock keeps running, I stand to receive a great annualized return on my capital invested. Remember, I held $4,000 per contract sold in my account and received $210 per contract. If this contract expires worthless, I stand to make 5.25% (before fees) in just two months -- an annualized rate of return of nearly 32%.

Another possible use of put options is if I already have a long position in the stock and believe it has irrationally sold off recently. In this case, I wouldn't want to sell the contract unless I didn't mind owning more stock. For example, lets look at a stock I covered yesterday, Bon-Ton Stores (NASDAQ: BONT). Let's assume I had a position in the stock at a higher cost basis and thinks the stock, at its current level, is very undervalued. Instead of buying more stock at the moment, I could choose to sell the October $30 puts on the stock for $1.30. In doing so, I'm essentially betting the stock won't drop below $28.70 (Strike price minus the premium) come late October.

Let's look into the two possible outcomes: the stock is above $28.70 per share in three months or the stock is below $28.70 in three months.

• If the stock is above $28.70 per share, I stand to keep the $130 in premium I received per contract. This works out to a rate of return of 4.33% in three months, or an annualized rate of return of more than 17%.
• If the stock is below $28.70 per share, I receive the stock (I buy it at $30 per share as stated in the contract) and pay for it with the capital he put aside in case this happened. If I had true conviction in the company, I'd have no problem taking a bigger position in it and now own a full position in the stock.

Cash-secured put selling is a very interesting way to make money in the options market while keeping an eye on the fundamentals. It's a great way to consistently earn income on names that you believe to be trading significantly below their intrinsic values.