3 Naked Puts for Big Premiums

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One of the joys of selling naked puts on stocks that have very high absolute share prices is that you can collect very large premiums.

naked puts premiums V CMG PCLN

Of course, because share prices are so high, you need a lot of cushion in case the stocks are put to you. Thus, my preferred strategy with naked puts is to sell them against companies I wouldn’t mind owning and that I also believe are either fairly valued or undervalued.

This way, I can get stock put to me that I am happy to have, at a price I like, and get paid for the privilege of doing so. And if I do this often enough with a high-priced stock, I can generate several thousand dollars in income.

Also, in general, you want to avoid selling expiration dates that are too close to earnings on either side. A negative surprise to a company’s earnings could change what you consider the fair value of the stock to be, and the resulting fall in the stock price could change the way you look at it.

With that in mind, here are three naked puts you could make to net big premiums.

Naked Puts on Priceline (PCLN)

Naked Puts on Priceline (PCLN)Priceline (PCLN) has always been a favorite target of mine. Although it made a foolish move in purchasing OpenTable (OPEN) for $2.6 billion in net cash, its core business remains fantastic. PCLN generates heaps of free cash flow and has roughly $50 per share still in the bank.

That figure means PCLN stock trades at an effective price of $1,200 per share and trades at roughly 23 times fiscal year 2014 estimates of $52.45 per share in earnings. The long-term EPS growth rate is pegged at 20%, and I have no problem giving Priceline a 15% premium for the amazing cash cow that it is. Thus, I regard PCLN as fairly priced right now.

I would sell the Nov $1140 naked puts for $16 and collect that $1,600 premium. If the stock is put to you, then you get it at an effective price of $1,124, or more than 6% below fair value.

But remember: A contract would put you on the hook for 100 shares of Priceline at $1,140, so don’t try this if you don’t have the funds to back it up.

Naked Puts on Chipotle Mexican Grill (CMG)

Naked Puts on Chipotle Mexican Grill (CMG)Chipotle Mexican Grill (CMG) is another great play for this strategy.

I’ve never been able to pull the buy trigger on CMG stock because restaurants make me nervous, but the financials look spectacular. With $26 per share in net cash, CMG stock effectively trades at $656 per share.

Now, the long-term EPS growth is pegged at 23%. On FY14 estimates of $13.66, that would put fair value around $327. However, the next two years, EPS growth is pegged at 33% … and considering Chipotle is in a major growth phase and generates fantastic cash flow, I’ll grant it that 33x estimate and put fair value at $450.

I would sell the Jan 2015 $580 put for $10. Why sell a naked put with such a huge price difference in fair value? Because I do not believe the market will take CMG stock down much from here. So here, you pick up $1,000 in premiums, and if the stock does get hammered, it would literally have to fall more than 100 points before you get it put to you. I love that margin of error for this situation.

Naked Puts on Visa (V)

Naked Puts on Visa (V)Finally, I would go with naked puts on Visa (V), which is going to benefit from its Apple (AAPL) partnership on a new payment system to rival PayPal. Visa is another great company, and even when it came out with bummer earnings a quarter back, the stock fell but rebounded. It has to. It’s past of an effective duopoly.

V stock has more than $6 per share in net cash, giving it an effective share price of $208. Long-term EPS growth is at 17%, but I give it a 20x valuation multiple for its great balance sheet and cash flow. On FY14 estimates of $9 per share, that makes $180 fair value.

Sell the Jan 2015 $200 naked puts for $4. It’s unlikely the shares get put to you … but if they do, Visa isn’t going anywhere long-term, and you’re holding a great company.

As of this writing, Lawrence Meyers was long AAPL. 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/2014/09/naked-puts-big-premiums-cmg-v-pcln/.

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