3 Spooky and Scary Puts and Calls for Halloween

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You know what I feel when I see the stock prices of Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG), Priceline Group Inc (NASDAQ:PCLN) or Amazon.com, Inc. (NASDAQ:AMZN)? Terrified! That’s appropriate, considering that Halloween is approaching, and I have puts and calls to trade for these scary sky-high stocks.

I would like to buy each of them, but at a price of multi-hundred dollars per share, it would give me an upset stomach worse than eating too much Halloween candy.

Instead, let me share a few ideas on how to get involved with these stocks using puts and calls, and strategies that my forthcoming stock advisory newsletter, The Liberty Portfolio, will be using.

These strategies give investors exposure to the long side for each of these stocks but tempers the risk by engaging in the natural hedging behavior afforded by options. Note, however, that these are somewhat riskier plays than I normally suggest.

Scary Puts and Calls for Halloween: Alphabet (GOOG)

googleAlphabet is not as spooky as it once was as far as valuation, and it has certainly established itself as a premier advertiser in today’s economy. Although I’m not crazy about its lack of multiple revenue streams, it is still providing investors with solid returns. It trades hands at 26 times earnings, net of cash, and has long-term earning growth of 20%, so it is not unreasonably priced.

If you want to use puts and calls, I think you can consider buying the Nov. 25 $785 call outright for $45. That gets you a contract for 100 shares of GOOGL for $4,500 instead of shelling out $81,100. If GOOGL closes above $830 on or before Nov. 25, you come out ahead. If you don’t, you can still execute the contract and buy the shares if you have the money.

Or you could sell the Nov. 25 $760 naked puts for $1,100. You fix your profit at $1,100 and if the stock doesn’t close below $749 on Nov. 25, you will break even.

Scary Puts and Calls for Halloween: Amazon (AMZN)

Scary Puts and Calls for Halloween: Amazon (AMZN)Amazon is tricky to assess a valuation for, because it remains a venture play in some ways while still generating lots of free cash flow from its existing businesses. It’s a totally unique situation for investors, and if you want to go long, you are betting that the market will sustain the company’s valuation on an ongoing basis.

I’m spooked about buying calls outright on AMZN. I think the way to play AMZN is to significantly hedge your bet by selling naked puts that are way out of the money, but are also far out in time to increase your reward. Mind you, the stock could get put to you at that strike price, so be comfortable with the idea that you could own it.

AMZN closed at $834 on Wednesday. The Feb. 17 $700 naked puts are selling for $16, so you can collect $1,600 now. If AMZN stock closes above $684 when expiration rolls around, you will make money.

Scary Puts and Calls for Halloween: Priceline (PCLN)

Scary Puts and Calls for Halloween: Priceline (PCLN)Priceline was a terrific and successful trade for over two years for me, and it is time to take another look. PCLN closed at $1,454, but it has much less cash than it once did. That makes it risky, because it has a valuation that’s a bit rich. But that’s the point of using puts and calls, right?

With earnings coming up in early November, I would prefer to trade out of the money naked puts that expire in December or later. That way the market can absorb any shortfall in earnings and still have time to recover.

The Dec. 16 $1,280 naked puts are selling for $13, which means you pocket $1,300 right now. That’s a 9% return for a two-month holding period. If you get PCLN stock put to you, it occurs at $1,287 after backing out the premium. Back out net cash and you get it at $1,137, which gives it to you at a reasonable price.

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.


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