Indeed, if you can identify what stocks are going to break out in an explosive move, you can jump on these stocks to trade them before they start to move.

While it cannot be denied that this is a trading technique, and have elements of speculation, we can use technical analysis to help us nail most of these moves by using performance studies on price and volume.

There is a predominant school of thought that volume preceeds price. In other words, we will see an increase in volume of a stock before its price starts to increases or moves up. Some call this On Balance Volume outbreak.

When we write a naked put we are effectively 'promising' to buy someone else's shares in future should stock price fall below a certain level.

For doing this we are instantly paid spendable cash for each share that we 'promise' to buy. If stock does not fall below this level (the strike price), then we simply keep cash without having to buy stock.

TIP:

Just like covered calls, only write naked puts on stocks that you would be happy to own and if you want to be more conservative, only sell contract equivalent of amount of shares you wish to buy, should stock fall below strike price.

As each option contract represents 100 shares of underlying stock, you can work out how many contracts you can afford to write simply by dividing amount of capital you want to invest in that trade by strike price of option you want to sell and then divide that number by 100.

Here's formula:

Capital/Strike Price/100 = Number of Contracts

So if you have 20,000 to invest in one trade and let's say that strike price of option is $10, then you can safely write 20 contracts.

By 'safely' I mean that you can afford to buy stock should you be assigned.

Another thing to remember is that should you be assigned, you would effectively be buying your shares at a discount.