The market just can’t make up its mind.
We’ve had some nice rallies over the past few weeks, and the volatility has created opportunities to sell naked puts. By selling them in the proper amounts, you can collect $1,000 in premiums over the next month.
With naked puts, you are selling the right to another trader to buy a certain stock at a certain price on or before a certain date.
If the stock closes at or below that strike price on the day the options contract expires, the stock is “put” to you — i.e. you are forced to buy it. If it closes above that price, you don’t buy it and keep the premium.
Of course, with naked puts you can also just buy back the put instead of being forced to buy the stock.
Make $1,000 on Naked Puts: Apple Inc. (AAPL)
I told you a few weeks ago to short Apple Inc. (AAPL) until it hit the $90-93 range, and then cover. Now AAPL stock has come back to $105. It’s still off its 52-week high, but there’s nothing wrong with selling some naked puts around this level and collecting some premiums.
Even if AAPL stock is put to you, after you back out its cash position and your premium, you’ll be getting it at a very attractive price.
That’s the point of using naked puts with blue-chips. If the stock gets put to you, you are getting a good stock that you shouldn’t mind holding for the long term. This is just a way of potentially getting it cheaper than the market is currently selling it for.
The April 22 $106 naked puts are selling for $3.16. In this case, if you sell two contracts, you’ll collect $632 in premiums. That’s also a 3% return for a 37-day holding period, which comes out to 30% annualized.
Make $1,000 on Naked Puts: Microsoft Corporation (MSFT)
Blue-chips don’t always offer the most generous of premiums, but the idea is to make the trade with stocks that don’t offer you a lot of risk.
Microsoft Corporation (MSFT) is still chugging along after all these years, closing Wednesday at $54.46. Believe it or not, it is finally less than 10% away from the all-time high it hit in the days leading up to the government’s declaration of it being a monopoly.
MSFT also has paid tons of dividends along the way, so when you add those back in, MSFT is in fact at all-time highs, with billions of cash on its balance sheet.
You can sell the April 22 $54 naked puts for $1.73. If you sell two contracts, you’ll pick up a total of $346 in premiums. The trade also earns you a 3.2% return, or about 32% annualized.
Make $1,000 on Naked Puts: Cisco Systems, Inc. (CSCO)
Cisco Systems, Inc. (CSCO) is another holdover from the days of the dot-com bubble. The stock hit $77 back in 2000, but fell off a cliff and never really recovered.
That said, it has tripled off its 2002 low, so if you got in then, you’ve done very well. CSCO can still be considered one of the blue-chips because it has a rock-solid cash position, produces tons of free cash flow, and while it isn’t growing earnings very much, it is still a leader in its field.
That’s exactly why it makes a good candidate for selling naked puts.
The stock closed Wednesday at $27.88.
Again, selling naked puts isn’t a home run, but selling one contract of the April 22 $28 naked puts at $1.25, you’ll make $125. That brings your total on the three trades to $1,103. On this trade, it offers a return of 4.5%, which comes to about 45% on an annualized basis.
As of this writing, Lawrence Meyers had no position in any security mentioned.
