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You're smart, but you were never successful in the Stock Market...
At times, your portfolio may have been up significantly, but eventually your performance would settle down to just mediocre. It was just too difficult to beat the averages. So after a while, you brushed the Stock Market off as something for chain-smoking wall street guys. You'll stick to your quest to build the next YouTube. (which by the way, if you can build me a guide for that one, let me know).

How often are you succesful with your stock trades? Chances are, you are probably profitable on about half your stock picks. What if I told you there was a strategy that is profitable 90 or 95% of the time? There does exist such a strategy, and lots of smart people like yourself use it every day to make lots of money. It's called Selling Naked Puts (with a name like that, how could it fail?). This article will give you the basics of how to put this strategy to good use.

First, some background on stock options:
"Puts" are stock options contracts. If you BUY a Put on a particular stock, you are purchasing the right to sell that stock at the Put's strike price. Every option contract also has an expiration date. For example, if Apple stock is trading at $100 on October 1 and you buy a Put with a strike at $95 and an expiration of Oct 16th, if the stock dips below $95 before Oct 16th, you can still sell Apple at $95. Buying a put is like buying an insurance policy on a stock. It limits your downside.

Conversely, if you SELL a Put, you're taking on the obligation to buy the stock at the Put's strike price. When you sell a put, someone pays you at time 0 for that Put..(perhaps a couple hundred dollars). In the example above, if you sold the Apple $95 Put, if Apple went to $90 you'd still be on the hook to buy it at $95 for a $5/share loss. However, if Apple remained above $95, then you'd simply profit from the sale of the original Put contract. You'd have no obligation to do anything to cover your position. The Put would simply expire, and you'd keep your proceeds.  When you sell a put, you're effectively selling an insurance policy. The policy holder (buyer of the Put) pays you to take her downside risk away. If the downside event doesn't occur, you profit. And if it does, you have to buy Apple stock.

The magic of selling Puts on stocks you actually want to buy:
What if you don't mind owning Apple stock? What if you were going to buy Apple stock at $100 anyway? If that's the case, then your worst case situation of selling a Put on Apple isn't that bad. Even if you're forced to buy Apple at $95 when it's currently trading at $90, at least you own a stock you want to own. And besides, if you were going to buy the stock at $100, you'd still be down if it was now trading at $90. My point is, selling Puts is an excellent strategy when you sell a Put on a stock you don't mind owning. Your worst case scenario just isn't that bad. And your best case scenario can be highly likely.

How likely is your best case scenario? In the beginning of this article, I mentioned you can profit in 90% - 95% of the Puts you sell.  The truth is, you can ultimately choose how sure you want to be about landing in your best case scenario. The higher the certainty that your trade will be a success, the lower the proceeds you will collect when selling the put. And vice versa. You can use a stock probability calculator, to determine the degree of confidence in your trades. For example, the screenshot below shows you that there is only a 9.01% chance that Vistaprint (VPRT) will close lower than $45 on November 16th. (It's currently trading at $49).

This means if you were to sell a VPRT $45 Put today, you'd have a ~91% chance of keeping those proceed from selling the put, without ever the need to buy VPRT stock. According to Yahoo Finance, the $45 Put sells for about&m=2009-11"> $205 per option contract. If you want more than $205 per contract, simply sell a put with a higher strike (and therefore a higher probability VistaPrint will actually close below that strike price). You could also choose to sell a Put contract with a longer expiration (perhaps expires in December). Because there's more time for the stock to reach it's price, you are compensated for this additional risk.

There is a magic to small gains. If you consistently place these smart bets, you'll be surprised how quickly they add up. Although you may only make $205 per contract, if you buy multiple contracts and consistently win the bets, you'll grow your portfolio quickly.

Of course, the strategy is not risk free. If the stock for which you sell Puts crashes, you're legally obligated to purchase the shares at the MUCH higher strike price. But remember, if you were going to buy the stock anyway, you are no worse off with this strategy. Except that with this strategy, you'll win 90% of the time.

Appendix:

*** Please don't sue me. I don't promise you'll profit from this strategy. I'm merely relaying a strategy that's worked very well for me over the last 4 years. You should be well versed in the details of trading Stock Options before you do so, as trading options can carry significant risk (especially if you don't understand them). There are lots of articles on the web. Read up!

*** Make sure your brokerage account allows you to sell stock options
I recommend Interactive Brokers for stock and option trading. It's used by the pros, and gives you real time access without the sugar coating. It's also cheap to trade. Only $1.50 or so per option contract. But feel free to use your ScottTrade, OptionsXpress, or eTrade account as well. You'll just need to sign a few pieces of additional paperwork.

*** Each option contract deals in lots of 100 shares of underlying stock. So buying 100 shares of Apple at $175 would cost $17,500. Not up to front that cash? Then try the strategy on a lower priced stock, where you can more easily afford buying 100 shares if the worst case scenario comes true.

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Most of you have heard of the 80/20 rule, otherwise known as the Pareto Principle. For those who haven't, the principle states that in many situations, 20% of your effort typically can yield 80% of the value. Lots of students apply this every day. 20% of time invested in an assignment can get you a B, but it would take much more effort to achieve an A or A+.

This theory is a powerful one. It allows anyone to maximize the efficiency and effectiveness of their efforts. The theory can apply not just to school assignments, but everything in life. Responding to email, washing dishes, writing posts like these, and launching new startups. It's perfect, right?

I think the 80/20 rule is wrong...well not wrong, but not entirely correct. I agree with the theory at "low" levels of investment... that at 20% of effort, one can achieve 80% of the value. But I think the Pareto Principle can mislead us. It guides us to spend little time on many things, without over investing in any one thing. But I believe that sometimes over-investment in a single effort is exactly what's required to reach extra-ordinary results. I believe that sometimes, with 100% effort you can unleash significantly more value than you ever thought existed in the first place.

Let's take a closer look at a typical school assignment. As the Pareto Principle states, at 20% of the effort, you may achieve a B on a class assignment. And at 80% of the effort, you may achieve an A. But what happens at 100% effort? I'm not talking 99%....I'm talking about devoting every mental cycle, perfecting every detail, and going all out on the assignment? What if you go beyond your instructor's expectations, and exceed even your own understanding of your limits? Great things happen....you can use this assigment as a stellar example of your work for job interviews...perhaps your instructor will hire you as a TA...you'll be sent to a conference to present your findings... or be published in a reputable academic journal. Perhaps you'll earn the respect of your instructor and collegeues, and receive the benefit of the doubt when you hand in your next assignment late. Word will spread of your stellar work, and you'll probably increase your grades on future assignments because you'll be auto-classified as a rockstar.

Choose wisely. Obviously, you don't have the time to devote 100% effort to everything you do. But try this on a small subset of all your efforts, and see what it untaps. And avoid the mediocrity trap. Don't spend 80% effort to earn a B+. Stick with B's on most, and aim for an A++ on one or two assignments every once and a while.

Evidence of this Theory of Extraordinary Results is all around us. Apple's Macbook line, Google's obsession with Ad quality, and even the incredible effort that it took to write, film and edit I'm On a Boat SNL skit (which garnered over 35million views on YouTube alone). But perhaps the best example is the Statue of Liberty in NY Harbor. If France had applied the 80/20 rule and made the Statue 30ft tall, it would have been a kind gesture for sure. Instead they decided to deliver one of the biggest bronze statues in existence at the time...Standing at 151ft, the statue of liberty was a HUGE gesture. Because of it's magnificent size and incredible craftsmanship, it was quickly recognized as a world symbol of American freedom. It was glorious, memorizing and noteworthy. A 30ft statue just wouldn't have had the same effect. To build the statue of this size took 100% effort. France went above and beyond, and achieved more than a Statue.

I think the 80/20 rule is a powerful one, and should be applied in many situations to maximize efficiency. But let's not forget that incredible things are achieved at 100%.