Use Naked Puts To Generate Income on Blue-Chip Stocks

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For many years, I was into selling covered calls. I could buy a stock I liked, and then sell a covered call against it to generate some immediate income from the premium I received. If the stock got called away, I could always buy it back and repeat the process.

arrowsThere was one problem with this strategy. It tied up my capital. I had to hold the shares of this nice company, but if I was only seeking to generate income, I had to invest my money to sell that covered call.

Then it finally hit me (because one is always learning when it comes to stocks), why don’t I just sell naked puts, instead?

Using naked puts to generate income on blue-chip stocks was a much more efficient way to use my capital. I didn’t have to own the underlying stock, as long as I had enough cash and/or margin buying power to do so should the stock get put to me.

Here’s a look at three blue-chip stocks that are great candidates for selling naked puts.

Naked Puts: Boeing (BA)

naked-puts-blue-chip-stocks

I like what I’ve been seeing with Boeing (BA) the past few years. Air travel has exploded again, and all the airlines are doing really well, which helps BA stock’s bottom line. I wouldn’t mind holding BA if it gets put to me, so I’m looking at selling naked puts against one of the all-time great blue-chip stocks.

With BA stock around $141, I can sell the July 24 $140 naked puts for $3.65. That’s $365 per contract, paid up front. That’s a 2.6% return for a 45-day holding period, or about a 21% annualized return — a very generous return for blue-chip stocks, which rarely show much volatility.

Just be aware that BA stock is due to report earnings sometime around that date, so if you aren’t sure you want to get stuck with the stock, then don’t sell these naked puts.

Naked Puts: Southwest Airlines (LUV)

naked-puts-blue-chip-stocks-luvSouthwest Airlines (LUV) is presenting a good opportunity for selling naked puts. The stock has shed about 20% of its value in the past month, apparently because they company is growing too quickly. I don’t really understand the market sometimes, but the recent moves in LUV stock are good for investors.

LUV stock trades around $34.60 and is due to report earnings on July 23, so I would look to sell the July 17 $34 naked puts for $1.25. In this case, you are getting a very generous 3.6% return for a 38-day holding period, or about 35% annualized. It’s very difficult to find premiums that high.

The opportunity comes partially because LUV stock is still reeling from its “bad” news, and because airlines in general have volatile stocks. Nevertheless, if the stock gets put to you, are you getting it at an effective price of about $33.10, which would be almost 33% off its high. It’s rare to get that kind of discount on blue-chip stocks.

Naked Puts: Mastercard (MA)

naked-puts-blue-chip-stocks-maBoth of the big credit card issuers are blue-chip stocks trading above 28x earnings, which is a bit pricey, but I’d be glad to hold either one. However, MasterCard (MA) has the better premiums, so let’s go with this great company.

MA has $6 billion in cash on hand, or about $5.50 per share, so that actually takes its valuation down to about 24x earnings.

With five-year annualized growth expected at 20%, I don’t begrudge the price, so I’m happy to own it if put to me. The stock is trading a little below $93. In this case, I would sell the July 24 $93 naked puts for $2.56. Because MA stock is not terribly volatile, we don’t get a blockbuster premium, but I won’t complain about a 2.7% return, either. That comes out to a 22% annualized return.

You can’t go wrong with MasterCard if the stock gets put to you. It’s basically one of the two largest credit cards in the world and will be around a long, long time.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he was long LUV. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.

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