I can’t exactly say the market has been dull, considering all the volatility and general insanity we’ve been seeing. It is, however, dull as far as earnings and single-stock stories go.
The third month of the quarter is when things get quiet, so normally premiums for naked puts aren’t that spectacular. However, because the market has been so volatile, we’re still able to get some nice premiums on stocks we might not otherwise enjoy.
Remember that with naked puts, you are selling the right for someone else to put the stock to you at a certain price on or before a certain date. If someone puts the stock to you, it means they are selling it to you at that price, and you are being forced to buy it. (So, buyer beware, you have to have the funds available just in case!)
Generally, I only like to sell naked puts on stocks that I either want to own or are considering owning. So, here are three stocks that I’m eyeballing for naked puts opportunities.
Naked Puts on Southwest Airlines (LUV)
The great thing about Southwest Airlines (LUV) when it comes to selling naked puts is that there are expiration dates every week instead of every month.
Since Southwest reports earnings on Oct. 22, you can sell naked puts right on through Oct 16, when monthly options expire.
Since LUV stock is 16% off its high, but not quite as low as it has been, it presents a decent value here at $38.90.
I would consider selling the Oct $38 naked puts for $1.05. First, you get a 90-cent buffer before the stock goes into the money. Then, you are collecting about a 2.7% return for a 31-day holding period, or about 30% annualized.
Should LUV stock get put to you, it is hardly the end of the world. You’re getting the airline with the best balance sheet and strongest operational and free cash flow in the sector for the equivalent price of $36.95.
Naked Puts on Verizon (VZ)
I think you have a great opportunity with Verizon (VZ). This is not normally one of the stocks I would choose to sell naked puts against, but the stars are aligning for a good deal.
Verizon closed on Tuesday at $46.38, and it does not report earnings until Oct. 20. So once again, you can sell the October monthly naked puts and take full advantage of the time premium part of the trade.
Have a look at the Oct $46 naked puts, which also are selling for $1.05. First of all, you have that 38-cent buffer before the trade goes into the money. You receive a 2.3% return on the trade, which comes out to about 26% annualized.
But take note — VZ stock pays its dividend around Oct. 7. If you already own the stock and are selling naked puts to possibly get more, you’ll get paid 66.5 cents per share.
Naked Puts on Whole Foods Market (WFM)
There’s some question as to whether Whole Foods Market (WFM) has seen its best days as far as the stock is concerned.
I have said in the past that picking up shares in the low $30s is a good idea. It may prove to be, but only time will tell. So one way to hedge this approach is to sell naked puts.
WFM stock closed Tuesday at $32.47, and you could sell the weekly Oct 30 $32.50 naked puts for $1.25. That’s a very generous premium of 3.9% for a 45-day holding period, or about 31% annualized.
On the one hand, that means you may end up getting the stock at a very attractive effective price of $31.25, or about 19 times earnings. That’s a pretty low multiple for WFM stock. Just be aware that organic growth is slowing at WFM stock, and that still may end up being too expensive a price to be paying.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. 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.
