by Lawrence Meyers | February 20, 2014 7:15 pm
One of the great benefits of steady, blue-chip stocks that you plan on holding in perpetuity is that you can generate extra income from naked puts and covered calls on these stocks at relatively low risk.
If you haven’t purchased these stocks yet, but want them for your portfolio, you can sell naked puts against them, pocket the premium and if it gets put to you, you own it. If it doesn’t, you can still buy it or repeat the naked put sell. Or if you do hold them, you can sell covered calls, generate income from the premium, and if it gets called away, you can buy it back. The idea is you intend to hold these forever, and try to juice a little extra income from them.
Following up on this week’s article on “3 Stocks to Buy and Hold Forever,” I thought I’d tie in an options article to these same stocks.
For Chevron (CVX) stock, which currently trades at $114.60, you can try both of these options.
Right now, the March 28 $115 call can be sold for $2.05. I like this trade a lot. First, you pick up a 2.1% return when you factor in the 40 cents you get by selling at $115, and that’s a roughly 23% annualized return. I also like it because you’ll be out of the trade before Chevron reports earnings in April, and if you are holding CVX stock around April 11, you get paid $1 per share in dividends.
On the naked put side, you could sell the March 28 $114 Put for $2.13. The same situation applies with the dividend if the stock gets put to you or if you buy it in the interim.
It’s your call: It depends on whether you think CVX stock will be up or down by expiration.
For AutoZone (AZO), you can buy it here at $536.15 (if you have the capital) and sell the March $540 call for $14. Adding in the $3.85 you pick up if the stock gets called away, that’s a net gain of 3.33%.
Again, if you have the capital, you can sell the March 530 put for $10.50. That’s a 2% gain, with more than $6 of downside protection before the stock gets put to you.
Berkshire Hathaway’s (BRK.B) B shares are a good choice for this strategy if you are a very conservative investor. The premiums aren’t huge, so if you’re a bit skittish about trying options, you’ll want to try them on a stock that you want to own for the long-term if it gets put to you or isn’t called away. Berkshire should give you the most comfort out of all of these.
Right now, BRK.B stock is at $113.10. If you bought it here and sold the March 115 call for $1.06, you’d earn a roughly 1% premium, or about 11% annualized. Or you could sell the March $115 naked put for $2, for a premium of just less than 2%.
As of this writing, Lawrence Meyers was long BRK.B. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.
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