A lot of investors think that they can’t play with options premium bets unless they have tons of money. They think they can’t touch a stock that costs $600 a share because one contract involves $60,000 in capital, should the stock gets put to you or if you buy the stock and sell a call. If their entire portfolio is only $100,000, then it’s too risky to do the trade.
That’s not necessarily true.
If you have $100,000, you can still make these options premium bets, although you have a lot more flexibility if you have a margin account that doesn’t have to be drawn upon. That’s because even if a trade goes against you, you can merely close out the option trade without having to exercise the option or have it exercised against you.
That takes us to this week’s choices, which involve making a lot of big premium income from stocks that are good companies and trading at high prices.
3 Options Premium Plays: Priceline Group Inc (NASDAQ:PCLN)
Priceline Group Inc. (NASDAQ:PCLN) is not the slam-dunk value play it once was when it comes to options premium, but remains attractive. There was a time you could sell naked puts far out of the money with little risk of execution, make a bundle, and if it was put to you, it was put to you at a value price.
Today PCLN is 36% off its high. It has $85 per share in cash, giving it an effective price of $960 from its current trade of $1,045. With an effective price-to-earnings ratio of 16, and earnings growing at 15.5% this year and 19% long term, this value opportunity still exists.
You can sell the PCLN Feb 27 $1,000 put for an options premium of $15.30, which is a 1.5% return for just an 22-day holding period, or 30% annualized. PCLN reports earnings on Feb. 19, so you could even close out the position to eliminate risk if you are worried.
But if the stock gets put to you at an effective price of $984.70, you are getting a bargain.
3 Options Premium Plays: Chipotle Mexican Grill, Inc. (NYSE:CMG)
Chipotle Mexican Grill, Inc. (NYSE:CMG) is a very similar situation. Here we have CMG stock trading at $671. It has $1.2 billion in cash and investments, or $40 per share in cash, giving it an effective price of $632.
Earnings per share for 2015 are projected at $17.50, up 25% from 2014, so fair value might be about $438. Arguably, CMG is overvalued, although I’d give it a 20% premium for its great cash flow and brand name for fair value of $544.
This is where I might choose to buy the stock and sell a call. You can get a good price of $16 for the CMG Feb 27 $670 call, which is a 2.4% return for 22 days, or 72% annualized.
Alternatively, don’t buy the stock, but sell the Sept $560 put for $17. You pick up $1,700 now; if the CMG stock falls by more than 15% and if put to you, you get it at fair value.
3 Options Premium Plays: Apple Inc (NASDAQ:AAPL)
I think a great play now is with Apple Inc. (NASDAQ:AAPL). After another great quarter, AAPL stock is clearly on an uptrend again. The stock is at $119. I’d be happy to own it here (actually, I do).
The stock trades at an effective, cash-adjusted price of about $93. On even the conservative long-term growth rate of 13% on 2015 earnings of $8.50, fair value is at $109, but I add premiums for cash flow, cash on hand and brand name, so it’s closer to $125.
The AAPL Apr $118.57 puts can be sold for $4.70. So if you don’t own Apple, you can collect the premium and if put to you, you get it at a bargain.
If you do own Apple, you pick up the options premium paycheck and, hey, if it’s put to you, so much the better. Either way, Apple is a great play with options premiums.
As of this writing, Lawrence Meyers owned shares of AAPL.
