Oh, the weather outside is frightful. Unless you live here in southern California.
Truth is, though, I like a little rain or snow on occasion. Instead, I have to settle for options ideas for the coming winter solstice. There are plenty of good ones out there, and these thematic articles stimulate my imagination for all sorts of interesting trades.
Netflix (NASDAQ:NFLX) is perfect for winter because, in the colder climates, what could be better than snuggling up with your sweetie and watching some great movies?
The great thing about this crazy stock is that while I think it will not survive over the long-term, it provides so much volatility that options trading can be very profitable. You could buy NFLX here at $84.80 (as of this writing) and sell the January 85 Call for $5.85. That’s a 6.9% return for just about six weeks, or an almost 60% annualized return. Alternatively, you might consider selling a naked January 82.50 Put for $5.05, which provides an absolute return of 6%, or about 51% annualized.
The danger with Netflix is you never know what’s going to happen with the stock. At this moment, there’s probably more near-term upside than downside, as not much will likely transpire on the downside until earnings. The announcement of an exclusive pact with Walt Disney (NYSE:DIS) certainly turned heads, although few people seem to be asking how this deal will be paid for.
Wintertime in cold climates also means people need heat, and that means turning to energy companies like Exxon Mobil (NYSE:XOM).
The thing I love about this company is that it’s not going anywhere. It’s going to be around for a very, very long time, it pays a dividend, and it has plenty of cash. And we’ll always have oil. I think a great way to play this through every season — especially winter — is to also buy the underlying and sell calls or sell naked puts. The idea here is that this is a stock you want to own over the long haul. If you get it called away you just buy back in, and if it gets put to you, then sell calls against it.
XOM is at $88.41 as of this writing, so sell the January 90 Call for $1.05. If it gets called away, rebuy and resell the call. Or sell the naked January 87.50 Put for $1.48. Not only do you get downside protection to $86, but you collect a 1.6% premium that you might end up just keeping.
But my favorite play of the three is for Select Comfort (NASDAQ:SCSS), the company known for its Sleep Number mattress. After snuggling up to watch a movie with your sweeties, you can retire to your comfy mattress for some pillow talk.
With the stock at $25.13 — and SCSS being a volatile stock — there are fabulous premiums. The January 25 Call can be sold for $1.50, or a whopping 6% absolute return, and 51% annualized return. Plus, the company is not subject to the whims of investors like Netflix. You also can sell the naked January 25 Put, but that’s only going for $1.40. I like the calls better.
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.