Fund Tries to Profit With Put Writing

NEW YORK (TheStreet) -- One year ago, fund provider ALPS launched the High Volatility Put Write Index Fund (HVPW) as a first-of-its-kind fund that sells, or writes, cash-secured naked put options. It is still the only fund whose primary strategy is put writing.

Selling cash-secured puts is basically a fairly conservative income strategy that works best in flat or rising markets. The word naked refers to the puts -- which is a right to sell a security at a specified price, known as the strike price, within a certain time -- being sold with no corresponding short sale in the underlying equity, and cash secured refers to keeping enough cash on hand to pay for the stock if the put option is assigned.

The biggest risks occur in a falling market or if puts have been sold on a stock that goes down a lot. Put selling would not be an appropriate strategy for anyone who believes the market is at a top.

The worst-case scenario is being forced to buy a stock at the strike price after it has fallen well below that strike price in the open market. I wrote about the mechanics of this strategy in greater detail when HVPW first launched.

Specifically, HVPW will sell put options that are 15% out of the money on 20 stocks that tend to have high-volatility readings. The higher the volatility of a stock, the greater the option premium received in the put sale should be. Premium is the cost of the option. Buyers pay the premium and sellers receive the premium. 

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