Naked puts remain one of my favorite option trades. For a very long time, all I ever did was sell covered calls. The problem with that strategy is that it requires an investor to own the underlying stock and to sell calls against it. By owning the underlying stock, you are forced to use capital to purchase it.
With naked puts, you get the same benefit as you do with covered calls, without the need to own the underlying stock.
Instead, you collect a premium and only put up capital if the stock gets put to you — i.e. gets sold to you, because the stock price fell below the strike price by the time expiration rolls around.
You can earn huge premiums if you sell naked puts on expensive stocks. Just be sure you either have the capital to purchase the stock if put to you, or you can handle a loss if you must buy it back.
Here are three stocks just begging you to sell naked puts.
Priceline (PCLN)
Priceline (PCLN) fell about 10% after earnings on Monday, approaching the $1,300 level.
I’m not surprised at the market’s overreaction to the guidance from Priceline. It doesn’t matter that PCLN stock beat estimates or remains an amazing business with huge cash flow. What does matter is that this move has created volatility — an options trader’s best friend.
You have many choices here based on your risk tolerance. PCLN stock has $80 per share in net cash, giving it an effective stock price of $1,231 and trades at around 25x estimates. I like the April $1,040 naked puts which are selling for $15.50. That means you can collect $1,550 right now, with a $280 downside buffer.
That’s a huge margin of error: Even if it falls another 20%, you are in the clear.
Chipotle (CMG)
Another stock that got the brush-off from the market recently was Chipotle (CMG). The company remains the premier fast-casual chain as far as growth is concerned.
CMG stock trades at $610, but has $50 in net cash. At an effective price of $560, CMG stock trades at 32x earnings. That’s pricey, but not unreasonable given its growth, clean balance sheet and strong cash flow.
Again, you have several choices. Given current levels, I would sell the January naked puts, because the expiration date is on the 15th, and the company usually reports after that. This way, you can close out your trade before earnings, in case they are bad.
So, consider selling the January 15 $565 naked puts for $10. Add a cool grand to your coffers while you wait things out the next two months. You’ve got a $46 buffer (7%) in there.
Apple (AAPL)
It’s not a super-expensive stock on an absolute basis, but I think Apple (AAPL) gives naked put sellers a great opportunity. Of course, the company remains the most successful in human history. With its $35 in net cash per share, AAPL stock trades at an effective price of $85.
Somehow, with $70 billion in annual profits, AAPL stock still only trades at 12x earnings. I consider it the ultimate GARP stock. You could sell any number of naked puts here, and it depends on whether you own the stock, want to own it, or just want to pick up some extra cash.
I happen to own the stock and would be happy to have more of it, so I’d be inclined to sell naked puts with relatively close expiration dates. However, if you want extra cash alone, then sell the July $120 naked puts for $10.35. That gives you $1,035 in cash, and if it gets put to you, cry me a river.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he was long AAPL. 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.
