So we’ve entered the boring phase of the stock market, which occurs every quarter. All the major earnings announcements are over, and we’ve got three weeks to whip ourselves into a frenzy over some other piece of news.
Still, that means this is a good time to make some options trades, particularly with naked puts, which is my favorite type of option trade. As a reminder, when you sell a naked put, you are selling the right for another investor to buy his shares at a given price (strike price) on or before a given day (expiration date).
Unless the price of the stock falls well below the strike price well in advance of expiration, the stock generally won’t be “put” to you until the date of expiration.
You are basically betting that the stock will either stay above the strike price by expiration, or that if it falls below, you are happy to buy the stock since you want to hold it.
Let’s look at three stocks where you can use naked puts before the next round of earnings reports.
3 Naked Puts for Profit: Apple Inc. (AAPL)
Apple Inc. (NASDAQ:AAPL) is offering a great opportunity right now. The unveiling of the Apple Watch didn’t thrill people, so there’s a little bit of bearish sentiment on the stock right now. That, of course, is crazy.
Apple remains one of the greatest American stocks you can own, even at this price of $127.14, just 5% off its all-time high.
When you back out the $25 in cash it has, it is trading at an effective price-to-earnings ratio of only 12! That makes it a great GARP stock, and if you don’t own it, why not sell naked puts against it?
The Apr $127.14 naked puts are going for $4.15, or about 3.26%, which comes out to about 27% annualized. So if the stock gets put to you, you get it at an effective price of $122.99. If it isn’t put to you, you collect $415 in premium.
3 Naked Puts for Profit: Dollar Tree, Inc. (DLTR)
You should also take a look at Dollar Tree, Inc. (NASDAQ:DLTR), which is now the largest dollar store chain in the country, following the buyout of Family Dollar Stores, Inc. (NYSE:FDO). The stock is up 300% over the past five years, as management has so perfectly executed through good times and bad.
The secular trend towards lower priced grocery options hasn’t hurt, either.
The stock is at $79.70, and presents a great time to sell naked puts. There may be some bearish sentiment about how easily the merger will be executed, which has bumped up premiums a bit.
The Apr $80 naked puts are selling for $2.10, which represents a 2.63% premium, or 23.4% annualized. That’s a very generous return for a premier company. If the stock gets put to you, you are buying it at an effective price of $77.60, or about 22x earnings, which is not historically a bad valuation to get in.
3 Naked Puts for Profit: Medallion Financial Corp (TAXI)
There’s a great deal in a small stock I wrote about a few weeks ago, Medallion Financial Corp (NASDAQ:TAXI). This is a specialty lender company that has been unfairly sold off by a market that doesn’t under the company’s business model.
There are many attractive reasons to sell puts here. The first is that I think the stock is 50% undervalued, so you get significant upside. The second is that it pays a 9.5% yield. The third is that tangible book value is $11.16, which means if the stock is put to you at the $10 strike price I suggest, you are getting in at below the company’s intrinsic value by more than 11%.
So if the stock gets put to you, cry me a river. The stock trades at $10.37, and the Apr $10 naked puts go for $0.45. That’s an incredible 4.5% return, or 38% annualized. If the stock doesn’t get put to you, I suspect you’ll have a couple more months to get in at this strike price, so you can re-sell those naked puts.
As of this writing, Lawrence Meyers is long AAPL, TAXI and has sold March naked puts on TAXI.
