Any time is a good time to sell naked puts or covered calls on blue-chip stocks. However, the best time to reduce the risk of having blue-chip stocks put to you or called away are between earnings reports.
There isn’t much that will shake up blue-chip stocks, but earnings reports certainly are one of them. However, once their announcements are out of the way, blue chips tend to be a lot less volatile.
On the flip side, this means small premiums — not exactly ideal for people chasing maximum income. But, if you’re worried about having stocks put to you or called away, it’s a reasonable trade-off.
Today, we’ll look at a few blue chips: MasterCard Inc (MA), Whole Foods Market, Inc. (WFM) and 3M Co (MMM).
Whole Foods Market, Inc. (WFM)
Whole Foods Market, Inc. (WFM) makes for a good blue-chip stock choice because a little volatility is lingering following its relieving earnings report last week. WFM is up more than 20% since its report, but I suspect it will quiet down and not go much higher.
If you agree, consider buying WFM stock here at $47.50 and selling the Dec $48 calls for $1.23. That yields you a generous 2.5% return just for the premium. If it gets called way, add another 51 cents for a total 3.5% return for a 40-day holding period. That translates to 32% annualized, which is pretty great for a covered call holding period of only six weeks.
If you think WFM stock might decline, you can pick up this blue chip at a discount to its present price. I would sell the Dec $47 put for $1.24. It’s also a 2.5% return with a 49-cent buffer on WFM stock being put to you.
MasterCard Inc (MA)
I’m also a fan of MasterCard Inc (MA), as it represents one of the biggest credit card issuers in regards to market share. It also tends to have a good deal of volatility even between earnings seasons.
MA stock trades at $84.59, and the nearest strike is at $85. You can sell the monthly puts here for $2.13, and backing out the 41 cents between the current price and the strike price, you’re looking at a return of about 2%, or 17% annualized.
That’s a return of 2.5%, or 23% annualized. The covered calls for MA stock are actually about the same, in that selling the Dec $85 call for $1.65 gives you a yield of 1.95%. If the stock gets called away, that yield rises to $2.06, or 2.43%.
3M Co (MMM)
You won’t get the biggest premiums on the bluest of blue chips, like 3M Co (MMM), but you can do well if you time your trade properly.
MMM stock is at $157.11. You could buy MMM stock and sell the covered Dec $160 call for $1.16. Now that’s a return of only 0.73%, so in this case, you might want the stock called away so you can pick up the extra $2.89 in capital gains. That gives you a total return of $4.05, or 2.57%, or 23% annualized.
You could also opt to sell the naked Dec $155 put for $2.35. That offers a more intriguing return of 1.5%, or 14% annualized. You also have a $2.11 buffer before the stock gets put to you.
As of this writing, Lawrence Meyers was long WFM. 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.
