One of the most effective times to engage puts and calls on various stocks is after a company reports earnings. The day of or after earnings in particular can be a great period to get sizable premiums due to the volatility that may accompany a certain stock.
I sometimes like to wait a week or so to let things cool off just a little, to get a sense of where the market wants to place a stock. I lose some volatility and also some premium, but also reduce the risk that my puts and calls will result in an actual execution. I want to avoid executions in general, just so I can collect premiums.
Now that we are in earnings season and lots of major companies have reported earnings, we can start to survey the puts and calls that might be available for us to take advantage of.
Let’s look at the puts and calls on three stocks:
3 Stocks Ripe for Puts and Calls: Walt Disney Co (DIS)
Walt Disney Co (NYSE:DIS) reported very strong earnings last week. Revenues, operating income, and net income were all up across the board.
Things are likely to continue going very well for DIS stock, especially now that we know The Avengers: Age of Ultron is performing like the blockbuster it is, and that we have faith the new age of Star Wars and Indiana Jones is about to begin.
The market had run DIS stock up before earnings, so the stock didn’t really do much, other than decline a bit. I think DIS stock remains undervalued and a growth stock, aka a GARP stock, at $108.
You can do puts and calls here, but I like selling the Jun naked $110 puts on DIS stock for $3. That’s a 2.7% return for a 38-day holding period, or 23% annualized.
If DIS stock gets put to you, cry me a river at getting a stock with 15% EPS growth trading at a reasonable price.
3 Stocks Ripe for Puts and Calls: Lockheed Martin Corporation (LMT)
Lockheed Martin Corporation (NYSE:LMT) is one of those defense stocks that is difficult not to own. It has its hands in so many aspects of national defense and logistics that even during an anti-military administration, it is doing well.
As for puts and calls, I think there’s a great play here if you already own LMT stock.
I happen to think it’s a bit pricey at these levels, so I would argue to sell some in-the-money calls for juicy premiums. If it gets called away, I would be too upset because I think you’ll be able to buy in lower at some point.
LMT stock is at $189. You can sell the Jun 19 $190 call for $3.90. Backing out the 59-cent capital loss, you get a return of 1.74%, and if you extrapolate that out, you’ll end up with 15.6% annualized.
To me, anything above 12% is a terrific bet for LMT.
3 Stocks Ripe for Puts and Calls: Southwest Airlines Co (LUV)
Southwest Airlines Co. (NYSE:LUV) is the most expensive airline stock on an enterprise value-to-EBITDA basis at the moment. It’s also the best airline in the market.
I do think this is a long-term hold, but I also think the stock may be overvalued in the near-term. However, you are being offered an extremely generous premium as far as puts and calls go for LUV stock, and I think it’s hard to turn down selling a covered call if you own the stock here.
The stock trades at $43. The Jun $42 call is going for $1.73. Back out the 10 cents in capital losses you’d get if the stock is called away, and you end up with $1.63 in premium or an incredible 4%. I consider 2% to be pretty good. That 4% premium translates to 34% annualized.
You’d also pick up another 0.15% in a dividend payment, which gets paid in early June.
As of this writing, Lawrence Meyers owns shares of DIS and LUV.
