Last month, I wrote that an In-the-Money Naked Put strategy was a good one for generating income and sometimes for buying stocks or ETFs at a discount relative to today's pricing. Additionally, this strategy is so conservative that it's available in most IRA accounts (with the proper paperwork submitted for option trading). In today's economic times where most income vehicles return considerably less than 4.0% annually, this low risk strategy can easily return more than 15%.

Last month, I cited an example where I assumed that I had $35,700 to create a portfolio. My goal had two parts: first, I wanted to earn at least 1.5% monthly (18% annually), and second, I wanted to build a portfolio of stocks and ETFs purchased at bargain prices (or if I didn't get that chance to buy positions at a discount, I would at least have 5-10% downside protection).

In my first report, I listed seven stocks/ETFs to make up my initial portfolio on 01/08/09: four large conservative stocks (McDonalds, Wal-Mart, General Foods and Colgate) and three Exchange Traded Funds (Agribusiness (MOO), Metals & Mining (XME) and Retail (XRT)). The following positions were taken intra-day on 1/08/09:

Symbol, Price, Feb Put Strike, Put bid price,% Return

MCD: 59.78, 55, 1.35, 2.45%

WMT: 50.84, 45. 0.99, 2.20%

GIS: 58.15, 55, 1.10, 2.00%

CL: 64.97, 60, 1.70, 2.83%

MOO: 29.84, 27, 0.85, 3.15%

XME, 30.49, 25, 1.05, 4.20%

XRT: 21.21, 19, 0.85, 4.47%

These positions were closed intra-day on 2/09/09 after 33 days of the option life with 11 days to go before expiration. All seven option positions were profitable, though many of the underlying positions were not:

Symbol, Stock Price, Put Ask Price and Gain per Contract

MCD: $59.04, $0.30, $103

WMT: $49.22, $0.25, $72

GIS: $58.39, $0.30, $78

CL: $64.05, $0.25, $143

MOO: $30.35, $0.25, $116

XME: $30.27, $0.30, $146

XRT: $21.00, $0.20, $126

In summary, $35,700 was invested for 33 days to return $784, a 2.20% return (or 24.3% annualized).

Notice, most of the underlying positions lost money, but the downside protection (option position's extent of being in-the-money) kept the option positions profitable, i.e., profit developed due to the option's value decay with time.

Utilizing this trading strategy, one could expect to generate ~$6,000 income monthly from ~$275,000 invested. It can be expected to make money in four of five possible outcomes for the underlying stock: (1) price doesn't change; (2) price goes up a little; (3) price goes up a lot; and (4) price goes down a little. It only loses money, if price goes down a lot, and even then, it doesn't lose as much as one would lose owning the underlying stock outright. This last can even be controlled by incorporating a hedging strategy, i.e., utilizing some of the premium by going long the next lower Put strike.

A more extensive tabulation can be found here:

http://triplescreenmethod.com/TradersCorner/TC090109.asp

by Richard W. Miller, Ph.D,

6-Sigma Master Black Belt

Statistics Professional

President TripleScreenMethod.com and

PensacolaProcessOptimization.com