Earnings season is upon us once again, that quarterly freak-out where every financial reporter screams at the top of his lungs about how this company or that company blew away or missed estimates.
It’s also a good time to squeeze out a little extra income from some of your rock-solid blue-chip stocks using naked puts. When I mention blue-chip stocks, I refer to those stocks that are solid long-term plays that you intend to hold for many years.
You are confident that they will continue to perform over the long haul, so that one quarter’s earnings aren’t going to make or break these blue chip stocks.
I like to sell naked puts with these blue chips stocks. First, you collect a premium for selling the right to have blue chips stocks put to you. Cry me a river. If the stocks get put to you, you now have a larger holding of a company you like — you can always sell it later. If it isn’t put to you, you collect free money from the premium.
Let’s look at three blue-chips that you can sell naked puts against now.
3 Trades With Naked Puts on Blue-Chip Stocks: Boeing Co (BA)
Boeing Co (NYSE:BA) is going to report on April 22. That’s a few days past expiration, so you can go ahead and move into the May expiration dates to find a good deal. At last check, the stock trades at $153.24.
I think the May $150 naked puts is the way to go. At last check the contracts sold at $3.02, so you are earning a very nice 2% return for this 32-day holding period, which comes out to about 22% annualized.
I also like that the strike price is more than 2% out of the money — that means you have a buffer zone between today’s price and the strike price.
BA stock isn’t expected to have a great quarter, with earnings only supposed to rise about 10 cents per share, or about 6%. That means it may be setting the market up for an earnings beat so it could move higher.
3 Trades With Naked Puts on Blue-Chip Stocks: Walt Disney Co (DIS)
I think you have to hold Walt Disney Co (NYSE:DIS) no matter what portfolio you have. This premier entertainment company just keeps getting better. Earnings are scheduled for May 5, and at last check the stock trades at $106.51.
I actually think that, even if DIS stock somehow misses estimates, the market won’t punish it too badly. It has a blockbuster year ahead of it, not the least of which includes the new Star Wars and Avengers movies.
There isn’t a massive premium for the May $105 naked puts, but I’ll take it. They’re selling for $1.97, or a 1.91% return for the holding period. That’s about 21% annualized.
As with BA stock, you get a $1.51 buffer zone for DIS stock before it triggers the strike price. Like BA stock, DIS stock is expecting earnings to be about flat year-over-year, leaving plenty of room for upside surprise.
3 Trades With Naked Puts on Blue-Chip Stocks: Caterpillar Inc. (CAT)
Caterpillar Inc. (NYSE:CAT) has been under pressure for quite some time. The stock is struggling and is 30% off its high. Some might say the company’s glory days are over, but I think you have a chance to buy in at a discounted price.
That’s why naked puts are great, because you get some premium to offset whatever price you pay.
At last check, the stock trades at $82.14, with earnings coming up next week. I think in this case you should look further out to June expiration. The Jun $82.50 naked puts are selling for $3.65. That’s a very generous 4% return for a two-month holding period, or about 24% annualized.
Yes, you are just slightly in the money, but getting CAT stock at an effective buy-in of under $80 probably makes long-term sense.
As with the other choices, CAT stock earnings are expected to fall from $1.61 to $1.36 per share, giving it plenty of room for upside surprise. If the numbers are worse than expected, I think response will be muted because a decline is expected.
As of this writing, Lawrence Meyers owned DIS stock.