A discovery of selling puts and calls against various stock jump-started my ability to generate income on a regular basis using options. If all you wanted to do was generate income using puts and calls, you could do that. It would simply be a function of how much money you had in your brokerage account along with margin availability, and whether or not you cared if you had a stock called away or put to you.
For the most conservative of investors, I always suggest buying a blue-chip stock and selling calls against it. If you get stuck with the stock, it’s a blue chip and you’ll eventually work your way back to even. If it gets called away, you just repurchase the stock and sell another call.
With naked puts, it’s the opposite. If you get a stock put to you, it’s a quality stock if you’ve chosen correctly. If it doesn’t get put to you, you can sell another put.
Using puts and calls, you can generate income for the upcoming holiday shopping season!
Naked Puts on Walt Disney Co (DIS)
Walt Disney Co (DIS) is a good choice for this strategy. Personally, I regard Disney stock as a “forever hold” stock because it is wrapped into the human experience on an international level. So my first choice would be to get more stock rather than risk having it called away.
That means I’d sell naked puts against Disney stock, which presently trades at $90.28. You can gobble up some holiday shopping income by selling the Dec $90 puts for $2.03. That’s a pretty generous return of 2.25% for a 35-day holding period, or 23.6% annualized. You also have a 28-cent buffer in there before any danger of having the stock put to you.
Plus, you get to use the put income to shop at Disney for your favorite relatives, and enrich those who do hold the stock.
Puts and Calls on Expedia Inc (EXPE)
Expedia Inc (EXPE) continues to execute on its own terrific online travel strategy.
In this case, with Expedia stock trading at $88.37, I would sell the Dec $87.50 put for $2.25. That gives you a 2.57% return for that 35-day holding period, which works out to 27% annualized.
Alternatively, you could buy the underlying Expedia stock and sell the Dec $87.50 call for $3.30. In this case, the sale of call yields a generous 3.77% on its own, or 40% annualized. However, should Expedia stock actually get called away, you suffer 87 cents of capital losses. That would lift your total return to 2.77%, or 29% annualized.
By the way, if you want to play both ends of this trade, you can. I would be thrilled to own Expedia at this price, and would buy the underlying and possibly have more stock put to me, or have it called away so I could sell new naked puts.
Puts and Calls on AutoNation, Inc. (AN)
AutoNation, Inc. (AN) is a great place to visit if you are treating yourself to a new or used car for Christmas, and the company continues to execute on all fronts. The stock trades at $57.73. AutoNation stock tends to have a nice degree of volatility, which usually means some hefty premiums.
You could go with either puts or calls because AutoNation stock is right by the $57.50 strike price.
The Dec $57.50 calls are selling for $1.70, and that’s a 2.94% return, or 31% annualized. If it gets called away, take away 23 cents of capital losses for a total return of 2.54%, or 27% annualized.
On the other side of the trade, you could sell the Dec $57.50 puts for $1.50. That’s a 2.78% return, which comes out to 29% annualized.
As of this writing, Lawrence Meyers was long DIS. 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.