We should have done this in the option thread 
What you state makes sense if stocks go straight up. Most of mine don't do that unfortunately.
Here are a few scenarios that are real world in my portfolio.
Many DGI Stocks move in a trading range much of the time. Say $45-50 is typical. You catch the stock down around 45-46 and at least a bit oversold. You could just buy the stock for $45. Or you sell a put that day with a strike price around $43. You get a 2% premium typically.
-The market and your stock corrects rapidly to $40. You are now in the stock at $42.10 instead of $45
-The market is in a slow decline. You may or may not be exercised but your entry basis is still lower than going long, every time.
-Or the market bounces around with no real direction like it does half the time. The option is statistically about 70% likely to expire worthless. The strike and contract duration affect that of course. Buying options is a losing game for most over time. The odds are intentionally tilted in the sellers favor.
-Or the market flies and your stock runs to 55 in a month. You clearly win by going long. The put seller only makes 2% this month. A smart put seller puts the stock back on his watch list and doesn't chase an overbought stock. I'm OK with the outcome because I'll keep making 2% or more every 3-6 weeks with the same money until I'm long. And the collateral is making $2 1/2% for now. Higher than the average S&P500 Div.
What Mike was stating earlier is WE pick our buy price, and we won't pay more. If the premium does not meet our risk reward, we simply don't sell the option. Obviously there is risk in giving somebody a month to decide whether they force you to buy their shares and I'm not giving that away too cheap.
One final point is we often don't have to buy a stock that falls a few dollars into the money if the story has changed in the meantime. I probably do that once a month. Just buy to close the put and sell a new one. In the end we are just selling time. If a stock crashes NVDIA style, we all get beat up. We just get beat up a few hundred dollars less. Right back to Mike's point.
What you state makes sense if stocks go straight up. Most of mine don't do that unfortunately. Here are a few scenarios that are real world in my portfolio.
Many DGI Stocks move in a trading range much of the time. Say $45-50 is typical. You catch the stock down around 45-46 and at least a bit oversold. You could just buy the stock for $45. Or you sell a put that day with a strike price around $43. You get a 2% premium typically.
-The market and your stock corrects rapidly to $40. You are now in the stock at $42.10 instead of $45
-The market is in a slow decline. You may or may not be exercised but your entry basis is still lower than going long, every time.
-Or the market bounces around with no real direction like it does half the time. The option is statistically about 70% likely to expire worthless. The strike and contract duration affect that of course. Buying options is a losing game for most over time. The odds are intentionally tilted in the sellers favor.
-Or the market flies and your stock runs to 55 in a month. You clearly win by going long. The put seller only makes 2% this month. A smart put seller puts the stock back on his watch list and doesn't chase an overbought stock. I'm OK with the outcome because I'll keep making 2% or more every 3-6 weeks with the same money until I'm long. And the collateral is making $2 1/2% for now. Higher than the average S&P500 Div.
What Mike was stating earlier is WE pick our buy price, and we won't pay more. If the premium does not meet our risk reward, we simply don't sell the option. Obviously there is risk in giving somebody a month to decide whether they force you to buy their shares and I'm not giving that away too cheap.
One final point is we often don't have to buy a stock that falls a few dollars into the money if the story has changed in the meantime. I probably do that once a month. Just buy to close the put and sell a new one. In the end we are just selling time. If a stock crashes NVDIA style, we all get beat up. We just get beat up a few hundred dollars less. Right back to Mike's point.