by Lawrence Meyers | February 12, 2014 11:56 am
I set a goal this year to generate $1,000 in income from options premiums each month. Although there are many options strategies you can utilize to do so, I’ve always preferred to use naked puts and covered calls. They are the simplest approaches, and I just happen to have had great success with them over my 19 years as a stock investor and trader.
There are some great naked put plays, but before I jump in, I want to remind readers of how they work and the risks involved.
When you sell a naked put, you are selling the right for someone else to put shares of a stock to you at a specific price, on or before the expiration date. You don’t actually hold the stock itself (or rather, you might already, but it doesn’t affect the trade). Therefore, you need to have enough money, or margin line, to pay for any stock that is put to you. Otherwise, if things are looking like the stock will get put to you, you’ll have to buy back the put you sold at a higher price and eat the loss.
The whole point of selling naked puts, however, is that you don’t mind holding the stock because it’s a good company.
So, onto these naked puts:
DirecTV (DTV) has always been one of my favorite stocks to use options to profit from. DTV stock is in very solid form with a good hold on market share for satellite TV both in the U.S. and Latin America. DTV stock has very reliable annual free cash flow in the $2 billion to $3 billion range. DTV stock has settled into stalwart status with reliable 10% annual EPS growth. Management under CEO Mike White is solid.
The stock is at $71.09, with the March 70 Put going for $1.67. You earn a 2.3% return, or about 19% annualized. You also get $1.09 margin for error because DTV stock trades above $70. Sell two contracts for $334 in income.
I’ve followed pawnshop company First Cash Financial Services (FCFS) for almost 10 years and am an expert in consumer finance.
While FCFS stock is more than 20% off its highs after reporting a weak quarter, I believe the company has a great long-term plan in place. First Cash already is taking over the Mexican pawn business, and will be expanding there for years to come. There is no real competitive threat nor will there be. So while near-term weakness is the story, and the stock is a wee bit expensive in that light, it’s a great long-term play.
Rather than buy FCFS stock, this is a perfect opportunity to sell naked puts. As of this writing, FCFS stock is at $50.34. The last trade for the March 50 Put printed at $2.55. That’s about 5% for six-week holding period, or around 42% annualized. Sell one contract for $255 in income to bring you to $589 total between DTV and FCFS.
Finally, we have Mastercard (MA). I was excited by MA stock’s recent earnings miss, because it had becoming an expensive equity, and I’d love to own MA stock since it is part of an oligopoly.
MA stock is presently 10% off its 52-week high. It’s hard to believe this is still a growth stock, but analysts sure think it is, projecting 17% annualized growth. MA stock is at $76.19. You can sell the March $76 for $2.17, generating a 2.8% return, or 23% annualized, with a 19-cent margin of error. Sell two contracts for $434, and that puts you at $1,023 for all three plays.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.
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