Uncovered Option: Naked Puts Explained

An uncovered option is an option trading strategy. If you have already been selling covered calls, then why not make income on the exact opposite option strategy and sell a naked put?If you have your eye on a a stock that you want to purchase, but it is at the height of its trading range, why not sell a naked put? It sounds a bit racy, but it is really quite easy to understand. For example an investor somewhere already owns an oil company stock that you want to purchase but you’ve been waiting for the price to go down from its high of $40. Instead of waiting, you will sell a naked put to this investor with a strike price of $36 which expires in six months.

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These puts are selling for 50 cents each. This means that he will pay you $1000 for your agreement that you will buy his 2000 shares from him for a price of $36 anytime over the next six months.

The Advantages For The Seller

Why would he do it?Because he is basically writing himself an insurance policy in case the stock drops below $36 per share over the next six months as you have guaranteed him that you will pay $36/share.

The Advantages For You – The Buyer

What do you gain? First you get the $1000 put premium and that’s yours to keep.Basically, you have been paid to wait for the stock to become cheaper as you will be required to buy this investors shares at $36 if the put contracts are excercised.

If the price never drops to $36, then you just keep the premium.Then once you own the stock, why not sell some covered calls? So, if you are going to buy a quality stock anyway, make some put money while you wait for a good entry price by using this uncovered option strategy of naked puts.Ask your broker about his company’s account requirements for you to begin trading naked puts today.

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You could also sell uncovered calls. This is also known as shorting a call.Basically, you are selling a call option to someone with a strike price higher than the current stock price.You are betting that the stock price will go down. But, if the stock price goes up beyond the strike price you will be required to supply the stock.The brokerage industry sees uncovered calls as risky and therefore they have account requirements such as minimum account balances.

Worry Less About The Fees and More About Your Profits

You often hear people talk about top no load mutual funds. But, when I hear someone use this phrase, it first makes me think that they don’t understand mutual fund fees and commissions.Whether a fund is no load should not be the focus.

Instead, here is another way to approach buying your mutual funds…

Buy Deferred Sales Charge Mutual Funds

First, if you have a financial advisor, he is usually going to charge you a commission on any mutual fund that you buy through him except the deferred sales charge versions of funds.And, if you are an aware investor, you know that you can avoid commissions on all mutual funds anyway by buying the deferred sales charge versions.

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Buy Directly From Mutual Fund Companies

Next, if you do use a system to trade mutual funds, and you don’t need a financial advisor, then you deal directly with the companies that sell the funds and they usually sell all of their funds as no load mutual funds.And almost every company offering mutual funds in North America has a website which lists all their funds and their returns from the various mutual fund categories. They almost all have sortable lists so you can determine which funds have the top returns in each mutual fund category.

Use Financial Websites

Additionally, you can go to financial websites like Yahoo, Google, Bloomberg, Morningstar or GlobeFund to find comprehensive and sortable listings of all the top mutual funds.

Remember The Impact Of Stock Market Cycles

And lastly, it worries me that people would select their mutual fund investments based solely on the criteria that they were a top no load mutual fund. This thinking is ignorant of the fact that differing sectors of the overall stock market perform differently during different market cycles.

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Focus On Mutual Funds With The Best Returns

Instead of worrying about load or no load, a key criteria in selecting mutual funds should be whether the mutual fund family offers a variety of funds from different sectors that you can switch to from time to time without being charged commission. This is why you need a good mutual fund investing system to lead you to the mutual funds that currently have the best returns.

The Online Brokerage Account Debate Which Account is Best For You?

Should you get an online brokerage account or some other kind of investing account? If you are like the character Gerry, in After The Haircut, you are unsure of which investing account you should work from to follow the ‘Three of a Kind’ trading system.Let’s start really simply. Basically, a brokerage account and an investment account are the same thing. However, in the investment industry there are some subtle and legal differences.

What is A Brokerage Account?

Traditionally, a brokerage account is held with a company who is licensed to broker many types of investments including mutual funds, etfs, stocks, bonds and options. You may or may not have a broker who advises you on these investments. If you don’t have a broker advising you, but you make your own trades online, then you have an online brokerage account. If you do have a broker, then you contact him whenever you want to make a trade, and he will execute it. You do not have the option of making the trade yourself online unless you have an online brokerage account.

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What is An Investment Account?

An investment account is basically a catch-all phrase with multiple meanings. Some people refer to the brokerage account described above as an investment account. Therefore, you either trade online or through your broker. However, you might also have an investing account with a company, or an advisor, who is not licensed to sell a variety of investment products. They may only be licensed to sell mutual funds for example. Therefore, these types of accounts are not brokerage accounts because you cannot trade all types of investments.

What Type of Investment Account is Best For You?

So, when opening an investment account, it is my recommendation that you do it with a broker who is licensed to sell all types of investments even if you only want to trade mutual funds. That said, the character Gerry already had an investment account with a financial advisor who mainly sold mutual funds. Because Gerry only wanted to trade mutual funds following Lawrence’s ‘Three of a Kind’ system, he decided to keep his advisor and trade from his existing account. If you follow this route, then you just must be aware of fees and commissions that your advisor will charge. You will not be making your investing purchases and sales online, but your advisor will be doing it for you. If all this sounds okay to you, and you don’t yet have an investing account, then simply ask your friends for a referral to someone they use. Then phone the person’s office and they will set up the accounts for you.

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Do You Want To Save A Little Money?

Now, if you want to reduce commissions even further, you may want to open an online brokerage account (also called an online investing account)with a company that offers them. These are mainly offered by brokerage companies affiliated with banks and with the fund companies themselves (US only). If you go this route, you will be opening your forex practice account, and making your trades online on your own. Some online accounts have the option to telephone in your orders, but the person taking the order will provide you with no investing advice.So, decide if you want an investing account that comes with an advisor and telephone him to set up your accounts.Or, open an online trading account.