Hedging Tips for ETF Traders

Please let Kirk know that the above noted article contains a significant error. Options 3: The "naked put."

What is written here does not describe a naked put. In fact, the terminology is all wrong. Kirk doesn't seem to understand the difference between a written put and a purchased put. He speaks of buying the underlying and buying a put. This is not a naked put. This is a coverred put. You own the underlying and possess the option to sell it at the strike price should the underlying's market price drop low enough to deem exercising it to be profitable. In this case, the strike price less the premium paid for the put option should result in a higher price that the current market price of the underlying.

What I think Kirk is getting at is that you can "average down" in a bear market by purchasing the underlying and writing/selling a put option (granting the BUYER the right and the SELLER/WRITE the obligation should exercise occur to purchase additional shares at a lower market price than paid the first time around. In this fashion, the writer of the put is forced to average down as the bull market pushes prices lower and the written put(s) are exercised.

Christopher A. Eirich 12:40PM May 25, 2009