3 Naked Puts for Long-Term Profits – AAPL DIS PCLN

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I don’t use technical analysis too often, as I think of it more like a windsock than a crystal ball. The times it comes in most handy are during big transitions in market sentiment.

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Right now, we are seeing virtually every index chart tell us that we are in a bear market.

While that doesn’t change the overall long-term strategy of having a diversified portfolio, it can create opportunities to use options — such as naked puts — to either hedge the portfolio or generate some extra income.

Naked puts are a great strategy to use in a bear market. It allows you to choose a price and date where you’d be willing to buy a stock, and sell a contract that pays you to do so, if that stock falls below that price on or before that date. If it doesn’t, you just keep the money for selling the contract.

Right now, I’ve got a few ideas for naked puts where I’d be happy to collect some cash or buy in at a much better price. Namely, I like them on Apple Inc. (AAPL), Priceline Group Inc (PCLN) and Walt Disney Co (DIS).

As always, make sure you have enough cash in your account to actually buy these stocks if they get put to you.

Naked Puts on Apple Inc. (AAPL)

Naked Puts on Apple Inc. (AAPL)Apple (AAPL) is creating an interesting opportunity.

Earnings and revenue appear to be decelerating for the mega-brand. I don’t think this is the end for AAPL stock, but I think the trend may be negative for awhile.

I wrote an earlier article suggesting you buy the stock at $90. It closed Tuesday at $100.

You can hedge your bet and get into AAPL stock at $90 using naked puts. One thing you could do is just wait things out, by selling the Oct $90 naked puts for $6.80.

You accomplish several things doing this. First, you collect $680 per contract, or a 6.8% return (9.1% annualized). Second, if AAPL stock falls below $90 between now and Oct. 21, you’ll have the stock put to you. Backing out the premium you received for selling the contract, and AAPL’s net cash position of $31 per share, you are getting AAPL stock at the equivalent of $52 per share.

Naked Puts on Priceline Group Inc (PCLN)

Naked Puts on Priceline Group Inc (PCLN)Priceline (PCLN), at $1,111, is 25% off its all-time high. Backing out its cash position of $80 per share, the business is being valued at $1,031 per share. Analysts peg five-year annualized earnings growth at 15%, so fair value on FY15 earnings of $57.73 per share would put the stock at $855.

I would actually put it a bit closer to $900, first to give it a premium for its cash position, free cash flow and brand name, then subtracting some of that premium to account for the possibility of a global recession.

You can sell the Jan 2017 $800 naked puts for $32. That’s $3,200 in cold, hard cash right now. If the market really blows up, and PCLN stock with it, you would have PCLN stock put to you at an equivalent price of $688 — that’s $800 less the $80 in cash less the $32 premium.

At that point, PCLN stock would trade at a mere 12x earnings.

Naked Puts on Walt Disney Co (DIS)

Naked Puts on Walt Disney Co (DIS)I think the market is very nervous about Walt Disney (DIS) and thinks the stock may fall further from its $96 perch.

DIS stock trades at 19 times earnings. Five-year annualized EPS growth estimates of 12.25%, and the 1.5% yield, gives us a 13.75x valuation. At $5.67 in FY16 earnings, that puts fair value at $78. I also assign a premium for its cash flow and brand name, so $85 is reasonable for DIS stock.

Well, you can sell the Jan 2017 $85 naked puts for $5.50. You collect $550 right now, which is a 5.3% return. Should DIS stock be put to you, you’ll be getting it at the effective price of $79.50. That puts it at 14 times estimates, and to me, that’s very reasonable and even cheap

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.

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