Selling a put is a simple, short-term incom strategy. When you sell a put, you have sold someone the right to sell.  As the stock falls, you may be obligated to buy the stock if you are exercised. Therefore, only sell puts out of the money (stock > put strike price) and on stocks you’d love to own at the strike price. You are expecting the stock to rise or stay sideways at a mimimum.

 Maximum Risk:    [Put strike - put premium]
 Maximum Reward:   [Put premium]
 Breakeven:   [Put strike - put premium]

Example

ABCD is trading at $27.35 on May 12, 2009. Sell the June 2009 $25.00 strike put for $1.05. You Receive Put premium $1.05.
Maximum Risk:  Strike price – put premium
                 $25.00 – $1.05 = $23.95
Maximum Reward:  Put premium
                 $1.05
Breakeven:     Strike price – put premium
                 $25.00 – $1.05 = $23.95
Return on Risk:  4.38%
Cushion (from Breakeven):  $3.40 or 12.43%

Advantages

1. If done correctly, you can use Naked Puts to gain a regular income from rising or rangebound stocks.

2. The Naked Put is an alternative way of buying a stock at a cheaper price than in the current market. This is because if you’re exercised, you’re obligated to buy stock at the low strike price, having already received a premium for selling the puts in the first place.

Disadvantages

1. Naked Puts expose you to uncapped risk if the stock falls.

2. Not a strategy for the inexperienced. You must only use this strategy on stocks you’d love to own at the put strike price you’re selling at. The problem is that if you were to be exercised, you’d be buying a stock that is falling. The way to avoid this is to position the put strke around an area of strong support within the context of a rising trend.