There’s no better way to generate additional income for your portfolio than selling naked puts against big-name stocks.
You immediately generate income from the premium you get by selling naked puts, and if the stocks get put to you … well, you get to own some of the best companies in the world.
You could certainly just buy these same stocks — the kind of stocks that are in the Fortune 500 — and hold them. There’s nothing wrong with that. However, Fortune 500 stocks have a tendency to just meander along making very modest gains over time.
So if you want to goose your returns a little, and make a little money, selling naked puts against them isn’t a bad idea.
And if you hold these Fortune 500 stocks already, you can always sell naked puts with the possibility that you will be handed more.
Naked Puts: Apple (AAPL)
For me, one of the best Fortune 500 stocks against which you can sell naked puts is Apple (AAPL). I already own Apple, but since I believe it is a underpriced GARP stock, I have no problem selling naked puts against it.
You’ve got a great opportunity in terms of timing. Right now, AAPL stock trades at $115.62. I really like selling the Jan. 22 $115 naked puts for $4 here. First, you pick up a really generous premium of 3.45%. For the 42-day holding period, that comes out to an annualized return of about 30%.
However, you also have a 62-cent buffer before AAPL stock gets put to you. Even better, AAPL stock reports earnings very late in the month, probably after expiration. So you get out of your option position before then and can strategize about what position you want to be in before the earnings bell rings.
Naked Puts: Microsoft (MSFT)
In a similar vein, another company with gobs of cash is Microsoft (MSFT). MSFT stock has become a really great choice for naked puts, as far as Fortune 500 companies go. It has lots of cash, amazing free cash flow, a reliable business, and you can’t go wrong having MSFT stock put to you.
Likewise, MSFT stock tends to report at the beginning of February. So, just like with Apple, you can sell the January expiration date well before earnings are released. You’ll have that option of positioning yourself ahead of the report.
MSFT stock trades at $54.98, so the obvious choice here is to sell the Jan. 22 $55 naked puts for $1.60. That is just a hair under a 3% return, and for the 42-day holding period, it comes out to about 26% annualized. If the stock gets put to you, remember you can always turn around and sell it before earnings.
Naked Puts: Home Depot (HD)
I think that Home Depot (HD) is a bit pricey these days, but at some point, you really have to own it or its competitor Lowe’s (LOW). They’re just too big as a combined category killer, they do tremendous business, and both were extremely well-managed during the economic downturn.
HD stock isn’t just about home improvement. It isn’t just about hardware. It is everything home-related, and that’s why you really need to own it or LOW stock. In this case, HD stock is trading at $131.90, just 3% off its all-time high. It’s a more conservative play than the others.
The Jan. 22 $132 naked puts are selling for $3.45. That’s a 2.6% premium, or about 23% annualized. It also allows you to exit the options position well before earnings. If the stock isn’t put to you, you could turn around and sell one further out, if you want to risk the earnings report.
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.
