I usually use options, especially when it comes to naked puts, as a way to juice some additional income from a portfolio every month. It’s one of the primary strategies for my forthcoming stock advisory newsletter, The Liberty Portfolio.
Here’s the thing, though: Naked put strategies are part of a long-term diversified portfolio. More than a way to create income, naked put options also make it possible to buy securities you’ve considered a position in, or positions you may add to.
Remember, with these options, you sell the right for another investor to “put,” or sell, a security to you at a specific price on or before a specific date. If the stock is above that strike price on the contract’s expiration date, the security does not get sold to you and you keep the money you were paid for selling the contract.
Lately, a few investors with more appetite for risk asked if I could do a story on naked puts, but for momentum stocks. These have large premiums, so they can generate a lot of income.
Just remember, if you get a momentum stock put to you, and the momentum falters, you could take a big loss
Naked Puts: Netflix (NFLX)
Netflix, Inc. (NASDAQ:NFLX) may be a momentum stock unlike any other. NFLX has risen so high over the past seven years, even after a 2011 crash, that if you’d climbed in anywhere along the line, you made money. After faltering a bit post-split, NFLX is on the move again.
Let me make it clear: Netflix is not a stock I want anything to do with. It has great programming, but the valuation is simply ridiculous. Others, however, may see an opportunity here.
NFLX stock is at $142 as I write. A high-risk play would be to sell the 19 May $140 naked puts for $6.80. You’d make $680 for this contract, and if Netflix is put to you, you get it at an effective price of $133. It’s about a 5% return for 57-day holding period, or about 33% annualized.
Naked Puts: Tesla Inc (TSLA)
Tesla Inc (NASDAQ:TSLA) is a joke to me. It makes cars, but no profit. And that is going to be the case for some time, if not forever. It just raised more capital, and I don’t know what those investors are smoking, but they better sell their stock before they get smoked.
I just fail to see a market for Tesla cars in any significant-enough volume for TSLA to become a hugely profitable enterprise. Maybe it will make money, but not enough to justify the current stock price of $256.
Still, it is a momentum stock and the volatility creates large premiums for naked puts. You could try and sell the 16 June $255 naked puts for $18, and pocket the $1,800 premium.
Personally, I would reduce the risk by selling the $235 naked puts for $960. You make half as much, but you gain a $20 price buffer.
Naked Puts: Chipotle (CMG)
Chipotle Mexican Grill, Inc. (NYSE:CMG) has simply been unable to bounce back from its E.coli PR disaster. It’s a real business, but that business has taken a real blow. It shows just how tenuous consumers are with food and restaurants. Even people who were going to CMG every day for lunch: If they get spooked and find someplace else to eat, it’s difficult to win them back.
Still, CMG managed to squeak out a profit in 2016 and even $90 million in free cash. It’s a far cry from the $400 million it used to make, but it’s not dead yet.
Chipotle shares recovered 20% off its low and is at $417. Here you may want to sell the 28 April $405 for $10. That’ll earn you $1,000 and give you a $12 buffer — which ain’t much. Still the contract only has 36 days, so things may work out.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
