3 Naked Puts Worth a Cool $1,000 in Income

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This week’s stab at generating $1,000 in monthly income comes from the world of naked puts.

naked-puts-expe-rgc-xom

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Naked puts are basically the reverse of covered calls. With covered calls, you’re selling the right to let someone else buy 100 shares of stock from you. With naked puts, you are selling the right to let someone else put 100 shares of the stock to you (so, force you to buy the shares) if the stock is at or below that strike price, anytime before the expiration date.

The upside? Naked puts can often provide excellent returns. But that’s also because they’re risky — after all, you could be forced to buy hundreds of shares of stock in the blink of an eye.

So, investor beware: Before using naked puts as an income strategy, make sure you have the money in your account to purchase that stock back.

If you’re game, here are three sets of naked puts that could net you $1,000 in monthly income:

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Naked Puts: Expedia (EXPE)

naked-puts-expe-stockThe first naked puts trade is for Expedia (EXPE), the online travel booking site.

EXPE stock has always been a good choice for naked puts. It tends to be volatile enough to create sizable premiums, yet is trading at a reasonable valuation. That’s why I like naked puts here — because you can collect income from the premiums — and if EXPE stock gets put to you, short of picking it up as Expedia is crashing into bankruptcy (not happening), you are picking it up at a valuation that is fair. Expedia’s $1.4 billion in cash and investments is equivalent to about $11 per share. Meanwhile, EXPE trades at 16 times next year’s earnings on 16% earnings growth, so that’s a deal I’ll take.

EXPE trades at $70.92 as of this writing, and the May $70 put currently trades at $540. You only need to sell one of these to pick up $540, putting you halfway on your journey to a cool grand.

This, by the way, is a very generous premium. It’s a 7.6% return for a five-week holding period, or a massive 79% annualized return. That’s a rare find. Jump on it.

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Naked Puts: Regal Entertainment Group (RGC)

naked-puts-rgc-stockThe next naked puts are for Regal Entertainment Group (RGC), which operates the more familiar Regal Cinemas.

RGC stock tends to be on the opposite end of the spectrum as far as premiums go. It is a range-bound stock because it has fairly consistent revenues, a fat dividend and a stable business in the movie exhibition arena. Thus, RGC stock options are best sold a few months out.

In this case, I look at the July $17.50 put. With RGC stock currently at $18.61, you can sell three contracts, and collect a modest 75 cents per contract for $225 total.

It’s notable that RGC stock has a 52-week low of $16.47, as I believe that means you have very little downside. Selling the puts for 75 cents each means you could get them put to you at an effective price of $17.22. Plus, for the shares to be put to you, the stock would have to fall $1.11 from here, or about 6%. You have lots of cushion here.

Add $225 to $540, and we’re now up to $765.

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Naked Puts: Exxon Mobil (XOM)

naked-puts-xom-stockLast on the list is another great naked puts play, Exxon Mobil (XOM), the diversified energy titan.

XOM stock is a great choice because it is priced high enough where you can get a nice premium for a naked put. In addition, I have no problem having Exxon — the global brand leader in oil production and exploration — in my portfolio if it gets put to me. (In fact, if it did, I’d start selling covered calls against it.)

But we aren’t there yet, so for now, with the stock at $98.68, you can sell the May 97.50 Puts for $1.60. Sell two for $320, and you’ve trampled our thousand-dollar goal with a grand total of $1,085!

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. 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 pdlcapital66@gmail.com and follow his tweets @ichabodscranium.


Article printed from InvestorPlace Media, https://investorplace.com/2014/04/naked-puts-expe-xom-rgc/.

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