Big-Time Income on 3 Big-Time Stocks

Advertisement

covered calls - Big-Time Income on 3 Big-Time Stocks

Source: Wikipedia

The beauty of trading options on high-priced stocks is that you can generate a big premium payout. The other great thing is that, if you choose a solid company, you can choose options set to expire many months out. The longer your contract period, the higher your premiums will be.

covered calls naked puts income

I’ve used this technique to great success over the past few years. The opportunities aren’t always there, but when they are, it’s a good idea to grab them.

Here’s a look at three companies I’m tracking for options plays because of their high-priced stocks. In this case, I have options for both covered calls and naked puts — how you choose to act should depend on what you already own/are willing to buy, and how much risk you’re willing to take on.

Covered Calls & Naked Puts on Priceline (PCLN)

Priceline stock PCLNLast month, I suggested buying Priceline (PCLN) at a bargain price of $1,178 per share. Today it is trading around $1,265, so I hope you got on board. And if so, this is a perfect time to hedge your purchase if you are so inclined.

PCLN Covered Calls: I might consider selling the Oct $1,300 call for $75. This is a huge premium that will net you $11,000 ($7,500 premium + $3,500 capital gains) if PCLN stock trades at or above that price on Oct. 18. Granted, you need to have the $126,000 in capital to do so. You also might give up some upside should that occur, but by that point, I think PCLN stock might be a bit overvalued, which is why I suggest considering a hedge. When you get a hundred-point run in a stock and it goes past fair value, I like to focus more on capital preservation.

PCLN Naked Puts: You could also consider selling a naked October $1,100 put for $30. This nets you $3,000 in income, with a $165 buffer between the present price and the strike price. If PCLN stock falls below that strike price, you can always buy back the put for a loss. At that price, however, PCLN stock would be at or below fair value and thus a bargain if you can afford to have the stock put to you.

Covered Calls & Naked Puts on Apple (AAPL)

Apple AAPL stockApple (AAPL) is back on track, having returned to its former high-flying glory, and now is trading at $637.50. Much of the enthusiasm surrounds Tim Cook’s purchase of Beats, which many say might be a huge revenue engine for Apple while putting Pandora Media (P) out of business.

Covered Calls: I can’t speak to that, but I can speak to the fact that AAPL October $650 calls are going for $30, so there’s $3,000 in premium alone for the taking if you so desire. I like this trade because it gives you upside while preserving capital.

Naked Puts: However, if you are long-term bullish on Apple as I am, you sell the October $600 naked put instead for $19.50. That’s $1,950 worth of income you get right away. If AAPL stock gets put to you, you are getting it at an actual price of $600. However, when you back out the premium you received, plus Apple’s $154 per share in cash and investments, you are getting the stock at an effective price of $427.50. That means you are getting AAPL sock at less than 10 times FY14 earnings, on a stock that should trade at a 15x estimate.

Covered Calls on Chipotle Mexican Grill (CMG)

Chipotle Mexican Grill CMG stockChipotle Mexican Grill (CMG) is another play here, although I think it’s a bit risky. The possibility for restaurant sales declines always exists, and CMG stock will always take a big hit should such a thing happen.

Covered Calls: That’s why I might go long CMG stock at $550, but then sell a September $550 call for $36. That gives me a $3,600 payout now, and 7% downside protection if CMG stock falls. The $33 per share cash cushion, along with the $36 premium, means I might be holding CMG stock at an effective price of $481, or 38 times FY14 estimates. CMG stock is growing at 22%, so even with a premium, I’d still own it at an expensive level.

Tread carefully with this one.

As of this writing, Lawrence Meyers was long AAPL and had sold October naked puts against PCLN. 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 at @ichabodscranium.


Article printed from InvestorPlace Media, https://investorplace.com/2014/06/big-time-income-big-time-covered-calls/.

©2024 InvestorPlace Media, LLC