Innovation is great, using it incorrectly isn’t.

I have written a few times about WisdomTree’s increasingly innovative suite of funds. WisdomTree was one of the first niche fund providers which at first focused on dividend oriented strategies but have since expanded to include a wide swath of strategy types including various kinds of alternative strategies, currency hedging, bear market products and so on. Early on in their existence when I wrote for the Street.com I got to meet some of the senior leadership as well as Jeremy Siegel and I got invited to some event they had at the New York Stock Exchange back in 2007, on June 14th apparently.

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One alternative road they’ve gone down is with funds that sell puts. Under the hood of a fund I am favorably disposed but have been very cautious tactically based on how late we are in the cycle, yes, the bull could go on for years. I don’t know but we are at nine and a half years and counting.

Selling put options is a bullish strategy or more precisely not a bearish one. When you sell a put you want the underlying stock or index (indexes can be a little trickier based on how they settle) to either go up or trade flat. The best outcome for a put you have sold is that it expires worthless and the way that happens is if the underlying stock does not go below the strike price of the put you sold.

As an example, a stock is trading at $100, you sell a put with a strike price of $95 for $2. Your put will expire worthless (again that is what you want as a put seller) if the stock stays above $95 (there’s a little more to it but that is the basic idea). If the stock goes below $95 you will be assigned which means you are on the hook to buy the stock at $95 regardless of where it is trading in the market. If the stock is at $93 or $94 and you buy it at $95, that’s probably not a big deal. What if you paid $95 for stock trading at $90 or $80 or $70? How about paying $95 for stock trading at $20? That last scenario is just about as bad as it gets and happened regularly to put sellers during the dotcom bust. In this scenario $7500 is just gone.