Blue-chip stocks are often the safest ways to buy and sell options.
In theory, a great company that has been around for many decades isn’t likely to go bankrupt.
That means there are two possible positive results if you choose to engage options to buy or sell blue-chips stocks at a given strike price on a given expiration date, even if that trade should go against you for some reason.
First, because blue-chip stocks tend not to have a lot of volatility, you aren’t likely to lose too much money if the trade goes against you.
Second, over the long-term, the price of that blue-chip stock is going to rise. So, if you get a stock put to you and it also happens to occur as part of a serious price correction, chances are you will be able to recoup that loss at some point.
Naked Puts: DirecTV (DTV)
One of my favorite blue-chip stocks to sell naked puts against for the past year has been with DIRECTV (NYSE:DTV). A year ago, AT&T, Inc. (NYSE:T) made a $95 buyout offer for DTV. The market has expressed misguided skepticism that the merger would go through, and DTV stock has hovered between $83 and $88.
That’s provided a perfect opportunity to sell naked puts against one of the best blue-chip stocks. If the stock gets put to you, you get a great company that may very likely be taken away from you at $95. If not, you keep the premium.
You can still sell naked puts against DTV, as it has finally traded above $90. You can sell the June $90 DTV naked puts for $2.13. Collect $200 for each contract, and feel good that the stock is not likely to be put to you and if it is, you can sell it to AT&T at a higher price.
Sell three of these for $639.
Naked Puts: U.S. Bancorp (USB)
U.S. Bancorp (NYSE:USB) is one of the great American banks. It has always been conservatively managed, has a rock-solid balance sheet and a 3200-branch footprint all over the country. It also avoided making too many toxic loans in the financial crisis.
USB stock is never going to be the sexiest stock in your portfolio, but it is consistent and reliable. That elevates it into the universe of blue-chip stocks and makes it perfect for naked puts. If you don’t hold a bank stock in your portfolio yet, it would make for a great addition.
USB stock trades at $42.56. You could sell the May naked puts if you like, but I would look for a bit more premium by selling the June $42 naked puts for 68 cents each. So if you sell three of these, you’ll pick up $204. Together with your DTV puts, you are now up to $843.
Naked Puts: Costco Wholesale Corporation (COST)
Costco Wholesale Corporation (NASDAQ:COST) is a great member of the blue-chip stocks universe because of its brand name, loyal customer base, and ability to generate consistent free cash flow of almost $2 billion every year. It has $7.5 billion in cash and short-term investments and only $3.8 billion in long-term debt.
Its testament as a blue-chip came during the financial crisis, when it held up just fine. When times are tough, people may not have as much to spend, but they’ll still spend it if they can get 30% discounts on the things they buy most. It’s quasi-recession proof.
COST stock is around $147. You can go one of two ways here. You can sell the May $146 naked puts for $203. That still gives you a buffer of almost a dollar before having COST stock put to you. That will give you a total collection of $1,046 on all three naked puts.
Or, you can sell the June $145 naked puts for $2.93, which boosts your total take-home to $1,136. That also gives you an additional dollar of buffer.
Lawrence Meyers has sold naked puts against DTV, for June 19 expiration at the $87.50 strike price. This article is for informational purposes only and does not constitute an offer or solicitation to buy or sell shares or securities in any company mentioned. This article does not constitute investment advice. Do your own due diligence and confer with your financial advisor before buying or selling any security. The author has not received compensation, directly or indirectly, current or prospective, from any known issuer, underwriter, or dealer in conjunction with the writing of this article.
