by Lawrence Meyers | March 10, 2014 9:34 am
Thanks to overwhelming positive response on my options articles — and particularly the ones where I aim to generate $1,000 in options premiums for expirations a month out (or two if the first one is too close) — I’m sending up another $1,000 flare.
In short, it’s possible to generate a somewhat stable flow of income via the use of options. Particularly, I use covered calls or naked puts to achieve this, though today I want to focus solely on naked puts. It usually takes three or four trades to reach the $1,000 threshold.
Remember: If you use naked puts, and a stock gets put to you, you must have the money available to purchase that stock. Those with margin accounts can generally borrow against securities they hold if they are short on cash. But in general, you’re going to need a substantial brokerage account to execute some of these trades, and again, there is a significant amount of risk in these strategies, so act accordingly.
The first choice for this month is Dollar Tree (DLTR), and I’ll use naked puts for this one.
DLTR stock is one of my go-to choices in this department because it usually offers good premiums. It also is a stock that, if put to me, I’m happy to own because it’s a solid company. Even though Dollar Tree’s last earnings report wasn’t stellar, it still is one of the top names in the dollar store arena and has solid financials. I don’t worry about having a lemon of a stock put to me.
DLTR stock closed last Friday at $54.33. The April 55 Puts go for $1.70. I’ll sell two of these contracts and net out $340.
The next choice for naked puts is a terrific company that is vastly undervalued. Encore Capital Group (ECPG) is a global buyer and collector of bad consumer debt. ECPG has a very sophisticated operation and just reported blowout earnings, with earnings continuing to increase at an astounding rate. I think ECPG stock should be trading in the mid-$60s, yet here it is at $48.69.
This is where I would love to have a stock put to me — at a valuation well below where I think it should be trading.
In this case, I would sell two of the April 50 Puts for $2.10, for a premium collection of $420.
I wouldn’t mind buying the stock either, then selling covered calls against half the position, but only if ECPG stock goes above $50. Right now, the 50 strike is too far away to make any good money on the premium from covered calls.
All told, you now have $760 in income ($340 + $420).
The last naked put of the trio is Starbucks (SBUX).
SBUX is almost the perfect stock to sell naked puts or covered calls against. It is a world-class brand that continues to grow and evolve, it has a stellar balance sheet, it sells multiple lines of products across many different distribution points, and is likely to survive the zombie apocalypse. I’d be happy to own the stock for the very long term.
SBUX stock trades at $73.07. The April $72.50 Puts are going for $1.70. I’ll sell two of them for $340.
The total premium collected is thus $340 + $420 + $340, or $1,100. Sure, that’s not a grand on the nose — but who’ll complain about a little extra?
As of this writing, Lawrence Meyers was long ECPG and SBUX. 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 at @ichabodscranium.
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