3 Premium Naked Puts for Substantial Income

by Lawrence Meyers | July 31, 2014 8:47 am

One of the best ways to keep your eyes open for selling naked puts and covered calls for high premiums is to simply keep a list of stocks. How exactly you build that list is up to you, but my suggestion is to follow a lot of sectors and keep an eye on those stocks with decent volatility but also have solid underlying businesses.

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Source: Flickr[1]

I tend to avoid screens because I don’t want to sell naked puts or covered calls on just any stock that happens to have a good premium. Especially with naked puts, I may end up having the stock put to me, so it better be a stock I wouldn’t mind holding. That’s why I also try to narrow the list to stocks I think are undervalued or, at least, fairly-valued.

These tend to be small or midcap stocks with good growth projections, although the occasional large-cap may slip in there. The smaller stocks are better because large caps don’t move with as much volatility so naked put premiums are smaller.

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Naked Puts on Conn’s (CONN)

naked puts on conns conn stockConn’s, Inc. (CONN[3]) is my latest discovery. It’s a rent-to-own regional operator that is still staking out territory, and renting items like mattresses that other competitors avoid. Conn’s has the attention of hedge fund manager David Einhorn on the long side, but it has proven to be volatile enough to provide decent premiums for naked puts.

CONN stock is at $40.93 as I write. Normally I might just sell one month out, but in this case, the Sep 40 Puts are selling for $3.10. That’s a fantastic 7.6% premium for a seven-and-a-half-week holding period, or a 53% annualized return. You even get a 93-cent cushion.

I’d be happy to scoop CONN stock up at an effective price of $36.47, considering fair value is well over $50, if not higher.

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Naked Puts on Expedia (EXPE)

naked puts EXPE stockExpedia (EXPE[4]) is one of my go-to choices for naked puts as well. Although the company doesn’t have the cash position it once did that made this a safer choice, it still remains a top player in online travel.

You might want to wait until after earnings are reported Thursday night, but that also means premiums will decline.

However, at the moment, with EXPE stock at $81.68, you can sell the Aug $77.50 puts and still get $3, which is a fantastic 3.6% return with a $4.18 cushion. So even if earnings disappoint, you might get the stock put to you at an effective price of $74.50 — that’s almost 10% below today’s price. Not bad at all, and worthy of consideration.

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Naked Puts on Chipotle Mexican Grill (CMG)

naked puts on cmg[5]Chipotle Mexican Grill (CMG[6]) went nuts a couple of weeks ago on fantastic earnings. CMG trades at 54 times earnings, but there doesn’t seem to be any stopping it. You’re hedged with its $33 per share in cash, and since earnings just came out, you have a window where not much should happen to the stock.

CMG trades at $681 right now, and you could sell the Aug 8 $670 Puts for $5. That’s $500 in your pocket right now, with only seven days of trading exposure. That 0.7% return is 36% annualized.

If you’re feeling a lot of bravado, sell the Aug 29 $675 put for $16.80. Just beware, that’s only a 2.4% move in a stock priced very high, and you could get it put to you.

As of this writing, Lawrence Meyers[7] had sold Aug and Sep $40 puts against CONN. He is president of PDL Broker, Inc.[8], which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books[9] and blogs about public policy, journalistic integrity, popular culture, and world affairs[10]. Contact him at pdlcapital66@gmail.com[11] and follow his tweets at @ichabodscranium.

  1. Flickr: https://flic.kr/p/FtDtt
  2. Compare Brokers: https://investorplace.com/options-trading/broker-center/
  3. CONN: /stock-quotes/CONN-stock-quote/
  4. EXPE: /stock-quotes/EXPE-stock-quote/
  5. [Image]: https://investorplace.com/wp-content/uploads/2014/04/Chipotle.jpg
  6. CMG: /stock-quotes/CMG-stock-quote/
  7. Lawrence Meyers: mailto:pdlcapital66@gmail.com
  8. PDL Broker, Inc.: http://www.pdlcapital.com/
  9. written two books: http://www.amazon.com/Lawrence-Meyers/e/B002BMEZ6U
  10. blogs about public policy, journalistic integrity, popular culture, and world affairs: http://www.ichabodscranium.com/
  11. pdlcapital66@gmail.com: mailto:pdlcapital66@gmail.com

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