For the Options Traders in the Audience

As part of my personal defense of free market principles (okay, it's really to make a little money), I sell premium on listed stock options for extra monthly income. I won't get into a long tutorial on options selling, but if you want to know more, here is an elementary description of the strategy.

Yes, there is risk involved, but I have been trading futures, stocks and options for over twenty years, and have paid the "tuition" required to make this a moderately profitable and enjoyable avocation, rather than a source of added stress.

Recently, I've started looking at options on Exchange Traded Funds (ETFs) in addition to options on stocks. I have to admit that I got out of my comfort zone at the outset by selling a naked out-of-the-money call at a strike price of 100 on an ETF that tracks the value of long term bonds (NYSE:TLT). Even though that option is over 5 points out-of-the-money with 3 weeks to go until expiration, bonds are in a short-term uptrend and have moved against me this week. Risk is infinite with naked calls, so I closed this position today at a gross profit of $40 (net $34.10 before taxes) so that I could sleep soundly over the weekend. You're right - that's a whole lot of risk for 34 bucks.

But I still believe that the profligate spending of the Obama Administration will drive interest rates up and bond prices down (you knew I had to get a shot at them somewhere here). How does the small investor profit from this, beyond keeping one's money in a mattress and waiting for CD rates to go up?

It turns out that there is a way. The clever folks at ProShares have introduced a fund that mirrors the TLT and also trades on the NYSE. It is called the TBT, and it is short the long-term bond market -- in other words, it goes up when bonds go down. Since I predict that bonds have further to fall, I believe that the both the TBT and interest rates are going up

So -- for far less risk, I was able to take a position consistent with my view of what Obama's policies will do to the economy by selling a cash-secured put on the TBT at a strike price of 46 (again, about 5 points out of the money), and put 30 more bucks in my pocket. The option expires on the 3rd Friday in July. I'll let you know how it goes.