First up, have a look at Dick’s Sporting Goods (NYSE:DKS). Although the economy’s alleged improvement is up for debate, the great thing about sporting goods is they tend to be relatively inexpensive. With the continued focus on healthy living in this country, Dick’s is a good place to be.
You can play it several ways. You could roll the dice and just buy the September 50 calls for $3 apiece and hope the stock soars more than 10%. You could buy the underlying stock, sell the September 50 calls for $3, and aim to make a modest 10% on the trade. Another way to go is a method that has brought me good success lately — selling naked puts on a solid company I wouldn’t mind owning. Selling the September 48 puts for $4 gives you about an 8% return without risking any capital up front.
If you don’t feel like grabbing your glove and heading to the ballpark, you can always watch America’s Pastime on DIRECTV (NYSE:DTV). I’ve had a lot of success with selling puts here, and given the company’s years of solid performance (particularly in Latin America), selling naked puts can earn you a great return and you may even end up with the stock.
The September 48 puts are only going for $2.50, but that’s a 5% return with no upfront capital risk. If you get assigned the shares, you get them put to you at the equivalent of $45.50. The company is, in my estimation, as much as 40% undervalued, so that’s a bargain.
What’s baseball season without snack foods? Don’t tell me you don’t chow down during a game! Kraft Foods (NYSE:KFT) has handled the Cadbury acquisition rather nicely, and settled into life as a Peter Lynch stalwart. The company generated $2.8 billion in free cash flow over the trailing-12-month period and Warren Buffet’s Berkshire Hathaway (NYSE:BRK) now has a 5% stake.
Kraft is a perfect set-up for selling rolling puts and calls. Here I either purchase the underlying — since it’s a good long-term stalwart for a diversified portfolio — and sell covered calls one month out. If it gets called away, I buy it back and sell calls again. If not, I sell the calls again. The May 37-strike calls are going for 80 cents each, giving me a 2.2% monthly return, which is my target for stalwarts.
Finally, why not own a baseball team? You can do it by purchasing Liberty Media (NASDAQ:LMCA), which owns the Atlanta Braves. Liberty also owns tons of other properties, and I love the company’s diversification and cash flow. It’s a safe bet, and as an expensive stock, it means good premiums, but there’s low volume.
Again, I’d either sell the October 90 puts for at least $9 if you can get ‘em, or buy the underlying and sell the October 90 calls for at least $4 if you can get it. With the stock at $84.50, you’ll do well either way.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.