heres the scenario... you own 100 shares of stock and are considering buying 100 more. lets say $FFIV.. stock is about at 125.. you can "sell a strangle" to get a better entry price or give you better upside than a covered call.
so you would:
Sell a Mar130 call for about $3.75 and
Sell a Mar120 put for about $3.40
for a total of about $715 per 1lot
now remember you already own 100 shares so selling the call is essentially like a covered call AND you are considering buying additional 100 shares (which means you have the margin/capital to do that) so Selling the Put is not naked..it is covered by that margin.
Possibilities at opex:
1. stock moves above 130, you get your 100 shares called away at 130 plus you keep the $715. ie...you are selling your shares for 137.15 (130+715) which is $1200 higher than were it is now..about 10% gain.
2. Stock drops below 120, you can get "put" the additional 100 shares at 120. but you keep the $715..giving you effectively an entry price of $112.85 (120-7.15) if you do not close out the put prior to opex
3. stock stays between 120-130.. you keep the $715.. about a 6% gain just on option premium.
This is an alternative to just sitting there and watching the quote screen all day wondering what to do with that margin you had set aside to buy more shares..gives you 10% more upside, 6% return if nothing happens, or gives you 6% discount on entry from current price.