New Fund Offers Cash-Secured Naked Put Options

In an up market, selling puts usually works very well. The next time there is a large decline though, the fund could get hit very hard. Remember that the fund sells puts in two-month increments.

As an example, in one two-month run from August 2008 to October 2008, Apple (AAPL) dropped from $175 to $100. With the stock at $175, the fund, if it had existed in 2008, might have sold puts with a $150 strike price, which at expiration would have worked out to a $50 per share loss. That loss would have negated one payment entirely and taken a bite from the subsequent payment.

(Keep in mind that was just one stock. In late 2008, it is likely that the majority of any group of 20 volatile stocks would have had large losses which could have wiped out many payments.)

>>>>Also see: Stocks Risky Despite Dow's First-Ever Monthly Close Above 14,000

Actual names in the fund currently include Netflix (NFLX), Green Mountain Coffee Roasters (GMCR) and Best Buy (BBY), which speaks to how volatile the underlying stocks are.

HVPW is not a bad fund, but it would likely not be a name to hold in the face of the next bear market.

At the time of publication, the author had no position in any of the holdings mentioned.

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This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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