One of the things I love about naked puts as opposed to covered calls is that with the latter, you must buy the underlying stock and hold it to sell the covered call. That means the capital you used to purchase the stock is unusable for other things.
With naked puts, you don’t have to buy the underlying stock.
The idea with naked puts is that you are selling the right for another investor to “put,” or sell, the stock to you at or below a given strike price, on or before the expiration date of the contract. In the interim, then, you can use the capital you might need to buy that stock, plus the premium you received, to deploy elsewhere.
And if the stock isn’t put to you, you can literally take the premium you earned for the sales of the naked puts and go to Aruba. (Note: You can use the premium for other things.)
With that in mind, here’s a look at three naked puts you can make to earn a cool $1,000 in options premium.
Naked Puts on the Market Vectors Oil Services ETF (OIH)
I think now might be a good time to nibble at energy stocks, but if you’re reluctant, consider selling naked puts on the Market Vectors Oil Services ETF (OIH). By climbing in with the best-in-class, broadly diversified set of oil services companies, you are banking on the inevitable recovery of the sector.
Oil isn’t going away, and neither are these oil services companies. The OIH is 25% off its 52-week low but still 35% below its high. So you’re right in the middle.
You can consider selling the April $26 naked puts with the stock here around $26. You should get about 85 cents per contract, which is a very generous 3.2% return for a mere 22-day holding period, or 53% annualized.
If OIH gets put to you, that’s fine. You can turn around sell covered calls against it, hold it or sell more naked puts as a way of averaging down.
Sell three of these for $255.
Naked Puts on Northrop Grumman Corporation (NOC)
One industry that will be in business for a long time is defense, and it should see quite a pick-up if more terrorism occurs. In fact, Northrop Grumman (NOC) is sitting right at its 52-week high. That suggests that prices may continue moving up, since highs often signal new legs up, so you can grab some premium and fun.
You’ve got a few choices here. The stock closed Wednesday at $195. You could just make it easy and sell the April $195 naked puts for $3.10, and that one contract gets you a 1.6% return and $310, for a total of $565.
Another play may be to go further out, but that does risk the market falling and taking NOC with it. The June $195 naked puts are selling for $5.60. That gives you a sizable 3% return.
Naked Puts on Ashford Hospitality Prime Inc (AHP)
There’s an oddball, but beneficial, situation going on with Ashford Hospitality Prime (AHP).
The company is in the midst of a foolish proxy fight launched by a holder of 8.2% of its shares. This fight has helped push the stock close to $10, and AHP has put itself up for sale. Its assets were worth $27, according to management’s assessment as of Aug. 28. They may be worth less now, but not below $20.
Whether a sale happens or not, the proxy fight launched by Sessa Capital is likely to go down in flames for many reasons, and management will remain where it is so it can focus on the sale.
Take advantage of this needless mayhem by selling the AHP July $10 naked puts for $1, if you can get enough volume for the trade. That’s an amazing 10% return for about four months, or 30% annualized. Sell five of them for $500, which puts us at a grand total of $1,065.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. 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. As of this writing, he was long AHP.
