For many years, the way I generated income from option trades was to sell covered calls against a certain set of stocks. But there was a major downside to this approach.
Selling covered calls meant I had to spend untold thousands on the stock(s) I wanted to sell calls against. These weren’t always stocks I held in my long-term diversified portfolio, so it depleted my cash stockpile. It also prevented me from buying and holding all the stocks I wanted.
Then I discovered selling naked puts. This would result in the same net effect of earning good premiums but without having to put up all the cash to buy the stock. With a naked put, you sell the right to another investor to sell you a given stock at or below a certain price on or before a certain date.
So, I would only have to put up money if the stock got put to me via the naked puts. But (and you’d be wise to note this) I did have to have enough cash and/or margin available to cover the purchase in the event the stock did get put to me.
Here are three naked puts that look good for a grand in premium right now:
Naked Puts on Apple (AAPL)
Apple Inc (AAPL) has proven to be a good stock to sell naked puts against. The whole idea of selling a naked put is you don’t mind if the stock gets put to you. You either hold it already and want to add, or you want to get in.
I happen to hold AAPL stock already, but I’d be delighted to buy more.
As I write, AAPL stock trades at $109.40. The Dec. 5 $108 naked puts are selling for $1.92. That’s a 1.75% return for a 32-day holding period, or a 20% annualized return. In addition, you have a $1.66 hedge before the put would even be triggered. I can’t say for sure, of course, but I suspect AAPL stock will be well above this level come Dec. 5, after the company tells us that holiday season shopping is going bananas.
Sell two of these for $384 total.
Naked Puts on Starbucks (SBUX)
The market got a little annoyed at Starbucks Corporation (SBUX) for a revenue miss last week. I just see it as an opportunity to buy in at a good price, and naked puts make great sense here. The stock presently trades at $76.10. The Dec 5 $76 naked puts sell for $1.65.
This is what I love about SBUX stock options — they tend to have really good premiums. This one nets you a 2.17% return for the 32-day holding period, or 24.5% annualized. That means that even if SBUX stock gets put to you, it gets put to you at an effective buy price of $74.45. That’s a great price for SBUX stock.
Sell two of these for $330, bringing your total to $714.
Naked Puts on DirecTV (DTV)
Finally, we have the mystifying DirecTV (DTV). The AT&T (T) buyout price for DTV stock was $95, yet here it languishes at $87.29. The market still thinks there’s a chance the buyout won’t go through, and every source I’ve spoken to says it will.
I think it will, which is why I’ve been repeatedly selling naked puts. I’m happy to take DTV stock at any price below $95 because it’s a near-certain think I’ll get paid $95 for it in the spring.
Sell the Dec 20 $87.50 put, but watch the bid/ask, which is a bit wonky right now. The spread is huge at a $1.37 bid but a $2.15 ask because of the merger uncertainty. I would put in a limit order near the ask and ratchet down, but don’t go lower than $1.75. You deserve a 2% return.
Sell two of these, and that takes you to $1,064 — a comfortable grand and a little change.
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 at @ichabodscranium.