This was originally published on RealMoney. It is being republished as a bonus for TheStreet.com readers.In this week's Options Mailbag, we tackle questions regarding the best way to short the transportation sector. Hey Steve, I'm looking to get short the transports, is there a good way to use options? -- JM
One step down on the risk ladder would be to use a sell-write. This consists of shorting the stock and simultaneously shorting put options. This is essentially the inverse of a covered call or buy-write. Of course, one drawback is that the capital requirement will be significantly higher than simply buying puts or a put spread. One will need to meet the margin requirement of shorting the stock, which is typically 50% of the share price minus the premium collected. Sticking with the IYT as an example, if you sold 1,000 shares and shorted 10 puts, you would have to pony up $41,500. Let's assume you want to go ahead with this trade; you short the stock at $92 and sell the September 90 put at $3.25 a contract. That gives you an effective sale price $95.25, or 3.4% above the current market price. But like a covered call, your profit is capped by the stock price minus the strike price plus by the premium collected. In this case, that is $5.25 (92 - 90 + $3.25 = $5.25). That would be a 5.7% gain over the next two months. Be aware that like a covered call, a sell-write offers limited protection. That means that if the IYT rises above the $95.25 breakeven point, losses will begin to mount. My preference would be to apply this strategy to specific stocks. Airlines seem like ripe candidates. Their shares have rebounded sharply as the price of oil has tumbled, and the implied volatility of their options is near 52-week highs. Let's look at Continental Airlines ( CAL), which recently traded from a 52-week low of $6, to $14 a share. One can short the stock and sell the August 12.50 put for $1 per contract. That gives you an effective sale price $15 a share which is a resistance level. The potential profit is $2.50, or 17%, over the next three weeks. If the trade works out, you'll be able to splurge and check a second bag on your summer vacation. This was originally published on RealMoney on August 1, 2008. For more information about subscribing to RealMoney, please click here. Plus, to subscribe to "Options Alerts," click here.