Why the Smart Money's Not Shorting Puts

You can end up getting long stocks that are going down, down, down.
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Want to know why you should never short puts? Why you should never write out-of-the-money puts to generate a little income, knowing that "Hey, the worst thing that happens is I get long the stock?"

OK, take a look at

America Online

(AOL)

. Not long ago this stock was 100 points higher. When it was there the August par puts, or 100s, were hefty. Probably could have sold them for 5, 6, maybe 7 points of premium.

Money in the bank.

Now look what happens. You bought it all right, at 94. You are now down 16. And you probably don't have enough money to keep taking these losses.

You never really intended to buy it, of course. You were just hoping to pocket the premium. Now you are long. And wrong. And hurting. That's where you never want to be.

If you want to know who else is selling on margin, getting closed out viciously and completely, look no further than those who sold puts when the cotton was high.

In 1987, when I left

Goldman Sachs

(GS) - Get Report

, I took a temporary office with a guy who did nothing but sell puts. He sold and sold and sold. He was richer than anyone I had ever met in this business. I stayed there for a few weeks. Nice guy.

He was out of business by 10 a.m. on the morning of the 1987 crash.

You don't want to be that guy.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Goldman. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

jjcletters@thestreet.com.