If you’re a bull, there are plenty of opportunities to make some good returns on investment without taking on the full risk associated with going long a stock. Using naked puts, you can earn money in the form of a premium you receive by entering into a contract to buy a stock at a later date.
Specifically, naked puts are options contracts. They permit you to sell the right to another investor to “put,” or sell, a given stock to you, at a certain price, on or before a given day. The price is called the “strike price,” and the date is called the “expiration date.”
If you sell a put that is below the price the stock trades at now, it’s possible that come expiration, that stock will not be below that price. Consequently, you keep the money you were paid for selling that contract.
Now, naked puts aren’t completely without risk. If the stock ends up below that price, you will be forced to buy that stock (or buy back the put), so you will need to have enough cash on hand to handle that worst-case scenario.
That said, here are a few naked puts I like right now on stocks with very, very big prices. Namely, Priceline Group Inc (PCLN), Regeneron Pharmaceuticals Inc (REGN) and Alphabet Inc (GOOG, GOOGL).
Naked Puts on Priceline Group Inc (PCLN)
One of my favorite stocks for selling naked puts has always been Priceline Group Inc (PCLN). That’s because PCLN is a robust business that pays good premiums for selling naked puts that are far below the current price.
Priceline shares are trading at a net-cash price-to-earnings ratio of 17.5 ($1,203 per share), which is very reasonable as it is, with EPS growth of almost 18% or so.
If you don’t want to get stuck having to put up the big money to purchase 100 shares of PCLN stock should it get put to you — because, ouch — then sell the Oct $960 naked puts for $17.50.
First, you collect $1,750 today; that’s about a 10% return. Second, PCLN has to fall more than 300 points for the stock to get put to you. If it does, you get it at an effective price of $942.50, or only 13.5 times EPS, and that’s a bargain.
Naked Puts on Regeneron Pharmaceuticals Inc (REGN)
Regeneron Pharmaceuticals Inc (REGN) was up big on Wednesday on positive data for a Phase 3 drug, sending the stock to $428, up about $25.
On days like this, it’s a good time to sell naked puts. Biotech stocks that move up on good news like this do not fall back again shortly thereafter, especially like REGN, which is making solid profit and has strong free cash flow.
The valuation situation is not as cut-and-dry as it is with PCLN. Still, the Aug $320 naked puts are going for $10, which nets you a cool grand, or about a 2.3% return. Moreover, you have a margin of safety of more than $100 should REGN stock fall.
REGN stock hasn’t traded that low since August 2014, so it seems like a safe bet.
Naked Puts on Alphabet Inc (GOOG, GOOGL)
Alphabet Inc (GOOG, GOOGL) has a lot going for it, as far as these naked puts go. It is a phenomenally profitable company, with mega-free cash flow. Even if GOOG stock gets put to you, you will get it at a good price with upside (assuming Alphabet doesn’t muck up its entire advertising model in the interim).
GOOG closed Wednesday at $746. There are a few ways to play this.
You can go out a bit and sell the Sep $635 naked puts for $15. That’s a 2% return, and you’d get GOOG stock put to you at $620 if exercised. Alphabet has $125 per share in net cash. So you’d get shares put to you at a net-cash price of $495, or only 14.5 times earnings. That’s pretty cheap for a company like Alphabet!
Alternatively, the Jun $685 naked puts sell for $10.80. That’s a 1.9% return, and if GOOG stock gets put to you, it happens at a cash-adjusted price of $560. That’s also just 16 times EPS, and also a cheap deal.
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 did not hold a position in any of the aforementioned securities.
