I bought the iPad for my wife this past Sunday – I had cracked the screen on her old one a few months back and as it turns out, this was the smartest thing I have done in a while. Meanwhile, the battery compartment on my Mac laptop began to act a little strange last week and so I bought a Mac mini yesterday. And, if course, everyone in my family owns iPhones.
What does this have to with generating weekly income?
All three products use flash memory for memory and the Mac mini has an option to use flash for storage as well. So when you think Apple (NASDAQ:AAPL), think flash, and when you think flash, think SanDisk (NASDAQ:SNDK).
SanDisk is a premier supplier of flash memory. Because it owns a lot of the intellectual property surrounding flash, SanDisk is able to collect licensing fees from competitors. It is a great company with a volatile stock price, as Wall Street (too often) trades the stock based on the spot price of flash memory or news that someone has announced a new fabrication plant for making flash.
This volatility, seen as a negative for people who own shares or calls on the stock, can be a great benefit for those of us selling puts on the stock. Because high volatility inherently raises option premiums, the put-selling strategy is one way to turn SNDK into a stock yielding at least 17% annually.
At current stock prices of $50.35 or more, you can sell this week’s SNDK March weekly 50-strike puts –and collect roughly 35 cents per share, or $35 per contract. Let’s assume traders agree with my view of the company for just a couple of days, SNDK stays above $50 through Friday, and the put expires worthless. You keep the $35.
Note that the sold strike price is relatively near-the-money, so this isn’t a terribly conservative play. If SNDK is trading below the $50 strike when the options expire, you will likely be required to meet your obligation of buying the shares at an effective price of $49.65 per share.
Do this 25 times a year because you have other things to with your time or capital and you have $875 in your pocket, a return of 17.4%. Do it 50 times year and you have $1,750 in your pocket for each contract you have sold, a return of almost 35%.
For purposes of disclosure, Michael owns shares of Apple and SanDisk.