Selling naked puts (being short puts all by themselves) is a risky trade reserved for experienced traders. While it can leave you open to significant downside risk, it can also be used as an effective hedge against other short positions.

Let's say SQ stock is trading for $60, and you are bullish on the stock, but volatility is quite high, making the options expensive. One thing you might consider is selling the downside puts. For instance, you might look at options expiring in 20 days and find that the $45 puts are trading for $2.00. If you were to sell one contract you would collect $200, and as long as the stock remained above $45 at expiration you would collect and keep the full amount. Below $45 you would begin to lose some of your profit, and below $43.00 at expiration the trade would be a loss. When you sold that one put you agreed to buy 100 shares of the stock at $45 to the buyer of the option. So, while the stock was at $60 you might think to yourself, "Even if SQ falls that far I wouldn't mind owning the stock at $45 (actually $43 since you collected $2.00 premium for the put)." Of course, at expiration you'd have to have the $4,500 available to buy the shares.

This can also be a good strategy when you are short the overall market. Let's say you own a number of puts in different stocks in companies you are quite bearish on. One way to hedge that position would be to sell the downside puts (like in the example just mentioned) of stocks that you are actually bullish on. If the overall market drags everything down, you'll still make money on your original long puts, which will be partially offset by any loss in the short puts.

In this video I'll discuss the idea a bit more.