Teeka Tiwari

How to Make Money Going 'Naked'

by Teeka Tiwari   08/20/08

It's amazing how the financial press seeks out reasons behind market moves. Sometimes they get it right, and other times they try to fit the facts to their opinions.

Right now, we are in an intermediate bull phase, and you should buy into the dips. And if you haven't covered your shorts, then do so now before you get squeezed.

Don't be afraid to look at some groups that have been considered pariahs. The financials and the real estate and biotech sectors come to mind.

There are several ways to play an up move.

Conservative investors can use exchange-traded funds (ETFs), while more aggressive investors can use call options. And, for the middle-of-the-road investor, I'd suggest selling naked puts.

Selling naked puts sounds scary, but if used properly, it's actually a very savvy way to buy stock. This strategy involves selling puts against a stock that you do not own, but want to buy.

Assume that a stock is trading at $25, and you want to buy 200 shares.

To use this approach, you would sell two at-the-money puts in the front-month contract (generally speaking, the earliest available contract with at least 30 days remaining until expiration).

Let's say that we're going to sell two $25 strike price put options at $1.50.

This means that if the stock goes below $25 by option expiration, we will be the proud owners of 200 shares of that stock. The stock will be "put" to us by the brokerage firm. The advantage here is that our cost basis on that $25 stock is only $23.50, thanks to the $1.50 in option premium we took in.

And if the stock slingshots away from us and never trades below $25, we still get to keep the $1.50 in option premium!

For many investors that are unsure about the day-to-day movements of the market, this can prove to be a very beneficial strategy.

Just remember not to sell more contracts than you would normally go long stock.

Also, be sure to have a stop loss in place on every position you enter. If the stock hits your stop before you have been "put" the stock, simply buy back the puts that you sold and your position will be closed.

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Teeka Tiwari is the Chief Investment Officer for Tycoon Publishing's Point & Profit. To learn more about him, read his bio.

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