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Investment adviser focuses on naked puts

Alex Fotopoulos, 42

Occupation

U.S.-based chief investment officer

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The portfolio

Stock options and cash

The investor

When Alex Fotopoulos worked as an IT project manager, he traded stocks "as a hobby." In 2009, he turned his hobby into a career by becoming a registered investment adviser.

How he invests

Mr. Fotopoulos sells naked puts, which are put options on stocks not owned by the option seller. When one is sold, the seller receives a payment for agreeing to buy a stock if its price falls below the strike price specified by the put. In effect, he is selling an insurance policy that protects against a large loss on a stock. And like an insurance company, he hopes to profit by collecting a surplus of premiums over claims.

If stock prices stay high and the puts are not exercised before their expiry dates, there are no claims and all of the premium income is kept. But if a stock falls below the strike price before expiry, the put seller is obliged to buy the stock – and its immediate or eventual sale can sometimes result in a loss that offsets premiums.

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Before selling a put, Mr. Fotopoulos thus screens the issuing company for reasonable valuation, growth potential, financial strength and other risk factors. The goal is to commit only to buying good companies at discounted prices.

"I'll have some claims against the insurance I'm selling, but hope that I've planned well enough to get through the rough times," Mr. Fotopoulos says. For example, to minimize company-specific risks, he is moving toward "selling puts on market indexes instead of stocks."

In 2013, his account set-up for option trading earned 23.9 per cent before tax, compared to 17 per cent for the diversified, buy-and-hold portfolio he uses as a benchmark.

Best move

"Not swinging for the fences on any single trade."

Worst move

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"Not being aggressive enough during the current bull market."

Advice

Mr. Fotopoulos provides more details on his investing approach in his book, My Trader's Journal 2012, available on Amazon.com.

Special to The Globe and Mail

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