3 Naked Puts With Generous Premiums

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I never really appreciated naked puts until a few years ago. Now, they’re one of my favorite plays.

3 Naked Puts with Generous PremiumsI was trying to figure out how to generate income from stock positions without having to sell covered calls against stocks that I held. The problem with covered calls is that capital must be put to work — you actually must own the underlying stock.

Then I discovered naked puts, which don’t require that capital actually be put to work to own the underlying stock. (At least, not right away.)

Especially if you have a margin account, you can sell naked puts with very little change to your ability to purchase other stocks (with cash or on margin).

Thus, you can sell a lot more naked puts than you might be able to sell covered calls, and without having to possibly dip into margin and get charged interest on those purchases.

There’s always a “catch,” of course — you have to be able to afford all the stock represented by those put contracts should those shares get put to you. Still, naked puts do afford you some flexibility, which is why I use them as part of an income-generating strategy.

Right now, I have three naked put plays to recommend:

Naked Puts on Team Health Holdings (TMH)

Naked Puts on Team Health Holdings (TMH)Team Health Holdings (TMH) provides outsourced healthcare professional staffing and administrative services to hospitals and other healthcare providers. This is a sector that has seen great success, as ventures that are able to consolidate healthcare operations and create operational efficiencies are more likely to earn business by keeping costs lower.

TMH likely will report terrific earnings. The stock seems to anticipate this and jumped to a new all-time high and settled out at $67.54.

I would sell the monthly Aug $70 naked puts on TMH stock for $3.65. My play is that I think TMH is going to go higher than $70, meaning you’ll pick up that incredible 5% premium for a merely 19-day holding period, or a whopping 95% annualized return. This is one of the most lucrative naked puts I’ve ever found.

Worst-case scenario is you get a great stock put to you.

Naked Puts on First Cash Financial Services (FCFS)

Naked Puts on First Cash Financial Services (FCFS)First Cash Financial Services (FCFS) is a stock I’ve followed for many years. Having all but disposed of its payday lending operations, it is now 95% a pawnshop operator in the U.S. and Mexico. It is a very profitable operation whose stock has stalled for some time.

That’s a perfect situation to sell naked puts against, because even though FCFS isn’t terribly volatile, its small-cap nature makes its options rather lucrative.

The stock is currently just above $40, and I would feel quite comfortable selling the Sep $40 naked puts for $1.40. First of all, that’s a 3.5% premium, and for a 47-day holding period, that’s well above my target (I aim for 2% per 30 days). That translates into a 27% annualized return.

Now, should FCFS stock get put to you, there are far worse things that can happen. FCFS deploys its capital very judiciously and only will grow its already-dominant pawnshop position in Mexico as the years go by.

Naked Puts on Netflix (NFLX)

Naked Puts on Netflix (NFLX)This might sound strange to those who know I think Netflix (NFLX) is insanely overvalued, but there is a trade here using naked puts.

After NFLX stock did its 7-for-1 split, it naturally became less volatile, given both lower price and higher share float. The path of least resistance for Netflix is up, and that’s why I went long a very small amount. However, a safer play is to sell naked puts against NFLX stock.

Netflix shares are trading around $117. Because anything can truly happen with NFLX stock at a moment’s notice, I would keep the expiration date close. You can actually sell the Aug 14 $117 naked puts for $3.16. That’s just incredible … a 2.7% return for a mere 11 days?

That’s what I’m going to do as soon as I finish writing this article. Which happens to be right now.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he was long NFLX, but will have sold the aforementioned put by the time this article hits press. 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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Article printed from InvestorPlace Media, https://investorplace.com/2015/08/3-naked-puts-nflx-fcfs-tmh/.

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