Naked puts are an option trade that I personally refer to as the “brain fart.”
For years, I generated options income by selling calls against long positions of stock that I held. The fear with calls was that it was always possible the stock I owned would get called away.
If that was a stock I wanted to hold, it meant I made a wrong prognostication about the stock being called. Alternatively, I might purchase a stock I really didn’t want to get stuck owning, but that might happen if the stock didn’t get called away.
So when I realized I could accomplish the goal of generating income by selling naked puts on stocks I either held or wanted to hold, without having to put up the money to own the underlying stock … well, I called it a “brain fart” and moved on with my life.
This week, we’re looking at three sets of naked puts that’ll bring you more than $1,000 before the end of December. Just remember — while you don’t have to put up your own money up front to buy the underlying stock, you at least have to have the funds available in case the stocks are put to you.
Naked Puts on Delta Air Lines, Inc. (DAL)
I never thought I’d suggest selling naked puts on an airline stock, but the flying machines are doing really well. Delta Air Lines, Inc. (DAL) is the airline with the second-best balance sheet in the sector. The stock trades at $43.09 as of Friday’s close. Meanwhile, the Dec $43 naked puts are settling for $1.40.
I want to point out how generous that premium on DAL stock is. It’s a return of 3.25%. With big, blue-chip stocks, I’m happy with 1.5%. For most stocks, I aim for 2%. So this is an incredibly robust premium, and that’s because airline stocks are both volatile and unpredictable.
That 3.25% premium is for a mere 27-day holding period, which translates to a whopping 44% annualized return. I suggest selling three of these for a total of $420.
Naked Puts on DirecTV (DTV)
The market must be skeptical that the merger between AT&T Inc. (T) and DirecTV (DTV) will go through — after all, DTV stock is at $87.43, which is nowhere near the $95 buyout price. I think the merger definitely goes through, so why not have the stock put to you below that price?
The Dec $90 naked puts are going for around $3.50, which is a 3.88% return on the premium — 52.4% annualized. Of course, that premium is very large because the option is well into-the-money, meaning you do have a row to hoe to get there, and if the stock ends up getting put to you, you’ll be purchasing them for even more than the current price.
However, getting the stock put to you isn’t necessarily all that bad. Should you get DTV stock put to you, and you hold until April and the merger goes through, you’ll have made between 1% to 3% on the premium depending on where DTV finished at December expiration, plus another 5.7% (with the expectation that DTV will rise back up to the $95 buyout price).
Sell one naked put on DTV, and you are up to a total of $770 in premiums so far.
Naked Puts on Trinity Industries Inc (TRN)
The last choice is a new company for me, Trinity Industries Inc (TRN), which mostly provides railcars for transportation. The stock trades at $35.48 as of Friday. In this case, the Dec $35 naked puts are selling for $1.20. Once again, a very generous premium of 3.38%, or 45% annualized.
Best of all, you also get a 48-cent buffer before TRN stock falls below the strike price.
Sell three of these, and you’ll end up with a total of $1,030 in total income.
As of this writing, Lawrence Meyers had sold puts against DTV at the $85 strike price for December expiration, which were sold in July. 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.