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An Options Strategy for Believers

Tom Online (TOMO): The April $20.00 puts look good at 40 cents. Right now shares are at $22.25. If the stock remains there, we collect our 40 cents, giving us almost a 2% gain in less than three weeks. If the stock goes down to $19.80, I'm happy adding to my position there.

InfoSpace (INSP): This stock has been in the portfolio for only two weeks, but it has had a nice move -- jumping 8.5% vs. 1.8% for the Nasdaq. However, with the stock now at $27.00, I don't mind selling the $25.00 puts for 40 cents each. That's because $24.60 (lower than our current cost basis) is a cheap price to pay for this stock.

United Online (UNTD): I would definitely sell the April $12.50s where they last traded, at 40 cents. This stock is beyond dirt cheap at this point, and I wouldn't be surprised if we quickly see it top $14.00. Crazy?

I'm "put crazy," you say? Not always. Here's an example where I wouldn't sell them.

E*Trade (ET - Get Report) is at $25.85 right now and the $25.00 puts are trading at 35 cents.

So if we were to sell them, and if the stock were to sit right here at $25.85, then we would make about 1.6% when the puts expire. That's not enough of a gain for me, particularly considering that E*Trade started the year at $20.00, significantly lower than where it now trades. It's just not worth the risk. Nor do I consider E*Trade particularly cheap here, although it's not yet at the level where I would want to sell the position, either. I just don't feel like averaging down at these levels.

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At the time of publication, Altucher and/or his fund was long CLCT and short TWX puts, although positions may change at any time.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of Trade Like a Hedge Fund and Trade Like Warren Buffett. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback; click here to send him an email.

Interested in more writings from James Altucher? Check out his newsletter, TheStreet.com Internet Review. For more information, click here.

TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.

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