Not everyone can sell naked puts. First your broker is going to want to know if you have any experience with options, and he's going to require a certain amount of cash or equities in your account, and that amount can vary from broker to broker.

This review is not intended as an in depth study on the subject, but as a brief review. If you have an interest in selling naked puts, I suggest you first begin by studying the subject. Don't just dive in. There are many good books available on the subject.

Let's work through an example. On Sep 18th Compaq Computer closed at 30 5/8. The Oct 35 Put closed at 4 5/8. If you're bullish on this stock you could do several things. But we'll discuss a bullish position by selling puts. If you thought the stock would reach or go beyond 35, you'd sell the Oct 35 Put.

Once your brokerage account is set up and funded, you would call your broker (or do it online), place an order to sell the Oct 35 Put. This is a "Sell to Open" order. You are selling something to open a position. If you sold 10 contracts, $4,625.00 would be deposited into your account the next day. This will show up as a short position on your statement from your broker.

Now, if the stock has risen above the 35 strike price on expiration day, the option expires worthless and the entire $4625 is yours to keep (less commissions of course.) But you don't have to wait until expiration date to do something with it. If you sold options at 4 5/8 and the stock price jumped very quickly such that the option price has now fallen to 1 or 1 1/2, you can buy them back and close out the position. Your profit is the difference in what you sold them for and what you had to pay to buy them back to close the position. Frequently, options are sold many times prior to expiration date.

What happens if the price of the stock drops after the position is opened? First, if you're the seller of the puts, and you haven't closed out the position on expiration day, the stock can be put to you. That means you have to buy the stock at the strike price. If you sold the Oct 35 Put and the price of the stock fell to 29, you'd have to buy the stock for 35. Of course, the cost of the stock would be offset with the premium you received in the first place.

You could choose to buy the put back just before expiration so that the stock would not be put to you. The Put price would be 6, and maybe a little change, since the put is 6 dollars in the money, right at expiration. You sold the puts for 4 5/8, had to buy them back for 6, so you have a loss of 1 3/8, right? Well that's right if you leave it there, but a salvage technique is to buy the put back for six, then immediately sell the next month put at the same strike price. You'd sell the November 30 put for 6 dollars (the intrinsic value) plus you'd get additional premium for the time-value. So the put might sell for 8 dollars. Now you've got another month for the stock price to rise. If it rises above 35, at expiration the option would expire worthless and the premium is completely yours to keep. This cycle could go on many times.

Selling puts can be very profitable, but like all option trading there is risk. It is possible to sell a put, and the stock price fall to zero. Your liability would be the entire strike price. Now let's be real, how many stocks really fall to zero? Not many, but it can happen. So when choosing the stocks on which to sell puts, use the same care that you would if you were buying call options.