A few years ago, I learned that I could enhance my overall portfolio returns by selling naked puts.
If I did it every month, I not only could generate $1,000 a month in additional income, but on a $100,000 portfolio, that would lift my returns by as much as 12% annually.
The trick, however, was choosing the right stocks to sell naked puts against. I want to be clear to all you gamblers out there — options are not for everyone, and selling naked puts willy-nilly will get you in trouble.
Experience has shown me the type of stocks that are most effectively used for naked puts, as well as when to sell them. That doesn’t mean that some of these stocks won’t get put to me. They have in the past.
The key is that I don’t mind if they get put to me because I generally believe them to be trading at or below intrinsic value.
$1,000 in Naked Puts: Nike Inc (NKE)
Let’s take Nike Inc (NKE), which I had actually ignored for many years as a stock. It had become overpriced, and I had doubts about its ability to sustain a competitive advantage in sportswear.
I was wrong.
I wrote about NKE earlier this week and found that it is actually worth buying at the present time. That also means it is worth selling naked puts against.
NKE closed Wednesday at $54.31. The company reports earnings on June 28, so you are carrying a bit of risk here in regards to having the stock put to you if earnings stink. However, because I see NKE as a long-term success story, if it gets put to you, and the stock craters, I would just average down.
The July 22 $54 naked puts are selling for $1.88. That is astonishingly generous. It’s a 3.4% return for a five-week holding period, or 36% annualized. I would sell two contracts and collect $370.
$1,000 in Naked Puts: Walt Disney Co (DIS)
I think Walt Disney Co (DIS) is in prime position for selling naked puts.
Everyone is upset right now over ESPN. Personally, I don’t have a clear solution for ESPN, although I imagine a la carte streaming is going to be a big part of it.
Regardless, I have faith in CEO Bob Iger. Disney has not made any bad decisions that I can think of over the past 30 years. I was one of the few who though getting Marvel Entertainment for $4 billion was a steal.
Thus, DIS stock is 24% off its high, and is cheap at $98.27, where it just closed. Look at the July 22 $98 naked puts for $2.38. That’s a 2.3% return, or about 25% annualized.
Frankly, I wouldn’t be sad to have it put to me. Sell two contracts for $476.
$1,000 in Naked Puts: Starbucks Corporation (SBUX)
Starbucks Corporation (SBUX) is in very similar situation as Disney. Investor were annoyed with the last earnings report and SBUX has been struggling a bit.
Again, this is kind of silly, because SBUX is now a global phenomenon. Heck, there’s one at Brandenburg gate now, and right next to the Vienna Opera House.
Starbucks continually innovates and experiments, and has the money to do so. Thus, with SBUX closing Wednesday at $55.35, you have a few choices. The company reports earnings on July 21, so I would avoid being linked to that report, and sell the July 15 $55 naked puts for $1.12. This is a 2% return, or 22% annualized. Sell two for $224, and you have a total of $1,070.
If you are feeling bold, and you think SBUX will deliver solid numbers and be rewarded, sell the August 19 $55 naked puts for $2.15. Now you pick up a 3.9% return!
As of this writing, Lawrence Meyers owned shares of SBUX and DIS.
