Both strategies are income drawing strategies. You are selling volatility to bring in premium. The risk of course is a spike in IV. 

Writing puts against the underlying has similar risks as that of writing calls against the underlying. The difference being the direction of the underlying. If you are short a naked call and the price rises above the strike and you are assinged, you must buy the underlying at the the market and sell it at the strike. The maximum loss is technically unlimited. When selling puts naked, the risk profile is different. If assinged, you must buy the stock at the strike and sell it at the market price. The maximum loss therefore is the strike price less premium received.

In terms of writing covered puts as an alternative for writing covered calls, just consider the various circumstances. Writing puts on owned stock theoretically decreases the price of the stock. If you buy the underlying at 50 and sell a put at 2 (with a 45 strike), you have effectively purchased the stock at (50 - 2 =) $48. If the stock decreases below the strike, say to 40, and you are assigned you now own the stock (again) at the strike price (45).

Good discussion, but I want to address this question in the OP:

 Is writing puts secured by the underlying stock a viable alternative?

I'm not sure what the OP is asking here. The quick answer is no, holding the stock does not cover a put that you sold. The only way to cover a short put is to have cash on hand. Now, you can sell the stock to raise the cash, but that's similar to having your stock called away, emphasizing the point that selling a put has a similar profile to covered calls.

Take an example. You own 100 shares of XYZ trading at $20. You sell a put with strike of $20. When the expiration date comes, XYZ is now at $10. Your put is assigned and you need to buy 100 more shares of XYZ at $20. But your current holding of XYZ is only worth $10, so you still need to raise cash to purchase more shares.

A cash-secured put is the safest way to go and I think brokers demand assets on hand as collateral in order to cover your trades.

I don't want to state the obvious, but just to clarify things, even to myself. 

Steve

M*_Philip:

....That said, I think either covered calls or cash secured puts are a good way for fundamental long term income investors to generate an income stream.  The key is to execute either strategy on stocks that you wouldn't mind holding for the long term at strike prices where you'd be happy to buy the shares.  Again, in the Morningstar framework, write the puts (or covered calls) at a strike near the five star price.  If you're income focused, you can also consider what you expect the yield to be if you buy the shares at the strike price (and assuming the dividend won't be cut).  Obviously, you'll get the most income if the shares are already below or near the five star price when executing this strategy.  You might want to look at the annualized premium measure available on the custom display controls on the options chains.

I'm hoping that, in the underlined sentence above, the 'five star price' strike target applies to the cash secured puts, and not to the (parenthetical) covered calls. 

It seems to me that one could look at a cash-secured put as a limit-buy order that generates income.  Similarly, the covered-call is limit-sell order that generates income.  Obviously, the analogies are not exact, since limit orders tend to fire when the limit price is reached, whereas puts and calls get assigned when the strike price is reached and (usually) the date is close to expiry. 

Nevertheless, I find it helpful to ask myself, "Am I willing to buy (for the put) this stock at this price on the expiry date?"   If I can't answer, "Yes," then I need to reconsider the strike, the expiry date, or the underlying stock itself.  I can ask a similar question when writing a covered call.  But the prices will be different.  For the call, I would be willing to sell at the one star price.

To me this seems like swing trading on top of a long-term position — particularly so if you sell the call when the stock is at the two star price and sell the put [buying back the call if you are short there] when the stock is at the four star price.  Doesn't work for all stocks, doesn't work all the time, but when it does work, it is sweet.

Finally, I am much less concerned about assignment of calls when I and working inside my IRA, and thus not worried about preserving a long-term capital gains position.  In the taxable account, I tend to use roll-outs to avoid assignment of a stock I have owned for a while.
 

I guess the first thing that came to mind was simple: "If you don't understand the mechanism of puts, you have no business writing them." There is no such thing as using a stock to offset or underly puts. Puts are an OPEN ENDED commitment, whose only safety net is the strike price. If you own a thousand shares of Stock X trading at 30, and sell 10 puts with a strike price of 25, you have zero protection. If X goes to $25.01, you keep the premium and own a thousand shares of Stock X that has depreciated $5k.

If, on the other hand, Stock X goes to $3, you now get to BUY 1000 shares of Stock X at $25, costing you $22K.  That and your underlying has now lost $27k. Hope the premium was worth it. Stay out of options.  

I have heard of older investors selling puts, believing the rich premiums are found money.  Well, one downturn and you have lost money. The only consistent money I make on options is writing covered calls, and occasional puts on market trends ( I started buying MBIA puts at $40 underlying. 

ernie,

You seem to imply that writing covered calls is much safer than writing puts, but that is not the case at all. In fact, they are quite similar. If you write a covered call and the stock price drops a large amount, what is the difference between that and having the buy the stock at the put strike price? Nothing. You still lost money. That's why it's important to select stocks that you are comfortable with and know something about them. Stock selection is critical.

Writing cash-secured puts and writing covered calls are just two ways to do the same thing. Some people prefer covered calls and some prefer writing the puts. It's what you're comfortable with and what your experience is like. But of course, the premium in either method is not "free" money at all, so that needs to be considered. In the case of a covered call, you are giving up upside potential and lowering your cost of the stock. If a written put is exercised, you end up buying the stock, but your premium discounts your cost there as well.

You mentioned that what a bad deal it would be if you sold a put with a strike price of 25 on a stock, and the stock price plummets to something like 5 bucks. OK. But there's no difference between that scenario and holding onto the stock in a covered call position as you watch the price fall to 5 bucks. Remember, you can also take action in any position to cut losses. You can roll down in the covered call, and you can also roll your put position as well.

That is nice about options.... you have the option to change it at any time.

JMHO

Steve

Steve: No intention of implying there are similar or dis similar risk profiles or that one is preferable. My response was to the poster who thinks his underlying stock is somehow a magical offset to risk.

I write covered calls on appreciated stock, as insurance and for income. I do not write naked calls, and have written a few naked puts. I don't consider naked put writing a reasonable tactic for retired folks. I take that back, I have written naked calls on stock liek LDK.   

OK Ernie, thanks for your clarification about your own experience and tactics.

Talking about risk, I'd never write a naked call. My broker doesn't even allow it. I do write cash-secured puts, so I guess that's not naked. And you're right, simply owning the underlying stock has nothing to do with writing puts.

Thanks for keeping the forum active. Not too busy around here lately. I think we'll get more posts as M* writes new articles for their Options section.

Steve