Bulls can find lot of opportunities to earn some solid returns without taking on all the risk with going long on a given stock. Utilizing naked puts, you can make money that’s called a “premium,” a payment you receive by selling a contract to buy a stock at a later date.
Naked puts are contracts, called “options.” They allow you to sell the right but not the obligation to another investor to sell (or put) a given stock to you, at a given price, on or before a certain day. The price is known as the “strike price,” and the date is known the “expiration date.”
If you sell a put contract for an execution below the current stock price, then when expiration rolls around, what if that stock is not below that price? You get to hold onto the money you were paid for selling that options contract.
Naked puts carry risk. Should the stock ends up below the strike price, you will be either be required to buy that stock or to buy back the put, so you will need to have enough cash on hand to handle that worst-case scenario.
Here’s how you can earn $1,000 on each of these naked put options.
Naked Puts to Sell: Priceline (PCLN)
Up until recently, a favorite equity to sell naked puts against was Priceline Group Inc (NASDAQ:PCLN). PCLN is a great business, whose naked puts pay large premiums, and you can earn good money by selling naked puts that are well below the current price.
At the moment, PCLN trades at a price-to-earnings ratio of 39, trading at $1,518. That’s pricey, given the 20% long-term growth rate. Still, as a growth stock, I can’t say it is outrageously priced. However, were the stock put to you at $1,100 per share, then you’d be pretty darn happy.
Thus, considering selling the June $1,100 naked puts, which trade for right about $10. That means you get $1,000 right now. PCLN stock would have to collapse 30% before June for the stock to get put to you.
It’s possible, but highly unlikely. You earn a 6.7% return for this six-month holding period, or about 13.4% annualized. You also don’t take on the risk of actually owning PCLN stock.
Naked Puts to Sell: Alphabet (GOOGL, GOOG)
Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) is in the catbird seat as far as being a profitable company, with a lot of net income and tremendous free cash flow. At this point, and for the foreseeable future, GOOGL appears to be one of few go-to digital advertising plays.
Yes, we’d like to see a more diversified revenue stream, and that will hopefully happen in time.
At its current valuation, it sells for 29x TTM net income of $19 billion. Back out its $140 per share in net cash and that comes down to 20x earnings. For a company expected to deliver 19% annualized earnings growth, that’s a bargain. So even getting it here at $819 is reasonable.
The June $660 naked puts sell for $10. Thus, if GOOGL stock gets put to you, you’ll be buying it at an effective price of only $650 per share, almost 21% below the current price and at a net cash P/E ratio of 14.
Naked Puts to Sell: Expedia Inc (EXPE)
Maybe these stocks aren’t for you, because of their absolute price per share. Then have a look at another online travel stock, Expedia Inc (NASDAQ:EXPE).
It is also in a terrific financial position. Its TTM free cash flow was well over $600 million, it has about $2.2 billion in cash and short-term investments, and has a solid management that isn’t overpaying for acquisitions. EPS is slated to grow at 27% annualized over the next five years, so at $6.38 per share, and a stock price of $116, it trades at a P/E ratio of 18. It is arguably undervalued as it is.
Still, if you don’t want to take on the risk of ownership, then consider selling the April $105 naked puts for $4.10 each. If you sell three of these, you’ll pick up $1,200 in premiums. Should EXPE stock get put to you, you will be buying it at an effective price of $100.90, or a P/E ratio of only 16.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he is short WRLD and holds puts. 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.
