If you are bullish on certain names, they offer opportunities to generate good money without the full risk associated with going long if you use naked puts. You will bank cash in the form of a premium you earn by selling a contract to buy a stock at a later date, if that stock closes below that price on or before that date.
Naked puts permit you to sell the right to another investor to “put,” or sell, a certain stock to you, at a strike price, on or before the “expiration date.” I will go into this strategy in much greater detail in my forthcoming stock advisory newsletter The Liberty Portfolio.
However, if the stock does not close below that strike price, then — glory be — you get to keep the premium from selling those naked puts.
For those seeking very large premiums that also have a larger appetite for risk, here are three names to think about.
There is risk, as I mentioned. This is important to remember, because when you see big premiums, they do carry significant risk. You have to be prepared to hold for the long term anyway.
Naked Puts to Sell: Amazon (AMZN)
One of the great stocks for selling naked puts, but which does carry risk, is Amazon.com, Inc. (NASDAQ:AMZN). That’s because AMZN is a business that offers nice premiums for selling naked puts that are significantly below the current price.
However, nobody seems to be able to value AMZN as a stock. Normally, I suggest selling naked puts against stocks that would have the stock put to you at a value price. In this case, you’re going on faith that Amazon is a long-term hold because it will eventually justify its price.
AMZN closed Wednesday at $822.59. Earnings are after the close today, so you may want to wait and adjust accordingly. Right now, you may want to sell the Dec 16 $740 naked puts for $10.50. That’s $1,050 in premium, so if the stock is put to you, then you get it at an effective price of $729.50 — almost a hundred bucks below current price.
Naked Puts to Sell: Regeneron (REGN)
Regeneron Pharmaceuticals Inc (NASDAQ:REGN) just got some bad news from the FDA on a drug it was developing with another company. Backing out its $13 per share in cash, REGN stock closed Wednesday at $350. Its two-year low was a non-cash-adjusted $330.
Thus, it would seem that there’s a floor in the near-term. In addition, this is a very profitable biotech company with solid cash flow and $1.3 billion in net cash.
After a big move — it fell from $441 since late July – the volatility means it’s a good time to sell naked puts. Volatility is what drives premium prices, so this is a pretty good time for naked puts. Just be aware earnings are on Nov. 4, so there is risk.
The Jan 20 $310 naked puts are selling for about $10, which offers sellers a cool grand, or about a 3.25% return.
Naked Puts to Sell: Alphabet (GOOGL)
Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) is obviously a great company and, so far, a great stock. While I’m not crazy about the extent to which its revenue derives from advertising, it also suggests that GOOGL is a digital billboard that is here to stay … and an effective one at that.
GOOGL closed Wednesday at $822, but with $130 per share in net cash, it has an effective price of $692, or about 20x estimates. That’s very reasonable. Thus, if GOOGL stock is put to you, you already get it at a good price even without the premium.
The Dec 16 $775 naked puts sell for $12. That’s a 1.8% return, and if GOOGL stock gets put to you, you will buy it at a net cash-adjusted price of $633. At 18x estimates, I consider that to be a bargain.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
