Right or wrong, I have been buying stocks on dips for the last five months, and the past two weeks I started adding naked puts to the mix on down days.

In short (no pun intended), I am opening an option to sell a stock I do not own. These "naked puts" pay me cash on the first day to accept an obligation to buy a stock in the future at a predetermined price. If the stock is one cent or greater below the strike price, it gets "put to me" and I have to cover the position by buying the shares pledged.

The subject of "naked puts" has been mentioned in several of my posts (most recently Keep your eye on Black & Decker and Black & Decker follow-up -- a few more thoughts), and I have received some inquiries about this trading option. Again I emphasize that this is a very risky proposition. I have only made these trades five times in my decades of investing all in the last few years after gaining a lot of knowledge and experience, with mixed results. Here's a definition from the Investopedia:

• Meaning: A put option whose writer does not have a short position in the stock on which he or she has written the put. Sometimes referred to as an "uncovered put."
• Caution: Naked puts are very risky since the writer can lose big if the underlying asset moves opposite to the desired direction. But, profits are huge if the underlying asset moves in the right direction.
• Still more discussion: TheStreet.com: Naked Puts Are a Dangerous Game

Why?: I have only one open option 'naked put' at this time and chose a very conservative position. About eight weeks ago I was looking at the Southern Company (SO) which I own in my Roth IRA for inclusion in our investment company portfolio. It was trading around $32. I was interested in getting a bargain and would have liked to buy it at $30. It has not traded at this price for quite some time and may not.

Since posting Keep your eye on Black & Decker last week I have had some discussion among other investors and business associates on-line and off about Black & Decker (BDK). There seems to be a general consensus that it is a solid company with strong fundamentals that has cyclical tendencies. This will be weighing on future earnings and no doubt is reflected in the decline of the stock price and the recent earnings report.

I do not own the stock but have been watching it for several months. It came to my attention through reading various business publications and I thought there was some merit to the positive commentary so I put it on my watch-list $25 dollars ago.

On rare occasion I trade options, (puts or calls), and usually have at least one option outstanding. In my original post I had concluded that BDK may be very close to fair value from all the data I had examined. I was thinking out loud that I may want it $10 cheaper seeking a deep value perhaps around $60 per share so I reviewed CBOE cboe.com/delayedquote/QuoteTable.aspx to get a look at options opportunities.

Since I might be willing to buy shares at $60, could I get paid to do so by selling naked puts (TRADING NAKED PUTS CAN BE VERY HIGH RISK!!) at that strike price. Well two things I learned. First, even with the large 25% decline in stock price of the past few months there was not much money in these options. The second is that there is very little "open interest" at all in doing this trade. There was opportunity at $65, $70 and up, but almost none at $55 & $60. To me this indicates that consensus has developed in the options picture supporting my thesis that we may be at fair value for BDK in the $65 to $70 range in the current market... and that I should keep tracking it for that possible deep value.

BTW, Black & Decker is not a must own stock, nothing is. So I can wait forever, buy something of better value, or do nothing. Patience absolutely pays off.

"You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing." -Warren Buffett

Sheldon Liber is the CEO of a small private investment company and the vice president for Design and Research of an Architecture & Planning firm.