3 Growth Stocks, 6 Naked Put Options for Big Income

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Growth stocks always make me a bit nervous. I just have bad memories of the dot-com bubble where I owned all these great growth stocks that did great for me in 1999, only to see them collapse in 2000.

3 Growth Stocks, 6 Naked Put Options for Big Income

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Since then, I’ve been very picky about growth stocks. I prefer to find growth stocks that I can get at a reasonable price, that have a margin of safety because of a huge cash position or because they produce great free cash flow.

One way to get into a growth stock that you might be considering is to use naked put options. With put options like these, you are selling the right for another investor to “put” the stock to you. In other words, they have the right to sell the stock to you at a given price, on or before a specific date. Of course, the hope is here that you’re merely getting the stock on a temporary dip — not a complete breakdown of the company.

The flip side? By selling that contract, you earn a premium, and if the stock isn’t put to you, you keep the money.

With that said, let’s look at some naked put options ideas for a few blue-chip growth stocks.

Naked Put Options on Chipotle Mexican Grill, Inc. (CMG)

Chipotle CMG stockChipotle Mexican Grill, Inc. (NYSE:CMG) is one such stock.

I worry about restaurant stocks because at some point, I fear patrons will just move on to a different food. However, I also think CMG stock may have staying power because Chipotle serves a good product, serves it quickly, serves it with quality and isn’t seeing much disruption in how it markets its very simple approach.

CMG stock is trading at $636. As for naked put options, you could sell the Jun $630 naked put options for $12 — a roughly 2% return for a 38-day holding period, or about 19% annualized.

Another approach is to sell the put options that are further out. You’ll make a lot more money, but also expose yourself to more risk, because it means there is more time for the stock to run higher (if you care), or for it to crater because of some unexpected disaster.

That seems unlikely, though, so selling the Sep $630 naked put options for $34 is quite a nice payday.

Naked Put Options on Apple Inc. (AAPL)

Naked Put Options on Apple Inc. (AAPL)I still think Apple Inc. (NASDAQ:AAPL) remains a must-hold in any long-term diversified portfolio. The stock has been caught in a trading range lately, which is good news for those looking to use put options.

I consider AAPL stock to be a GARP stock, so if you can grab it at an even lower price, so much the better. Being range-bound, and at the lower end of that range, you have a few choices here.

AAPL stock is at $126. The Jun $125 naked put options are selling for $3.10. That’s a nice 2.5% return, or about 22% annualized. If the stock is put to you, you get it at an effective price of $121.90.

Now, AAPL stock could bounce to the higher end of its range, so you might want to sell the Aug $130 naked put options, which are going for an even more attractive $8.90. You end up getting the stock put to you at about the same effective price, but if that doesn’t happen, you make almost three times as much money in premium.

Naked Put Options on Netflix, Inc. (NFLX)

Naked Put Options on Netflix, Inc. (NFLX)If you really want to be speculative, you can play with the put options on Netflix, Inc. (NASDAQ:NFLX). Personally, I think NFLX stock is insanely overvalued — it is not worth the $590 per share it sells for — but some investors may disagree.

Because NFLX stock doesn’t report its next earnings until the week of July 20 and there’s an options expiration on July 17, you have a very nice window to act within if you want to limit risk. NFLX stock tends to move big on earnings, then muck around in between.

Still, it mucks around enough to give you some great premiums.

If you want to be crazy, go ahead and sell the Jul 17 $590 naked put options for $38. The play is just slightly in the money already, so just collect the $3,800 in premium and cross your fingers (unless you think NFLX is undervalued).

The more prudent move would be to sell the Jul 17 $510 naked put options for $10. That way you pick up a cool $1,000, but give yourself 80 points of downside protection. Just tread carefully.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He is the manager of the forthcoming Liberty Portfolio, has 20 years’ worth of experience in the stock market and has written more than 1,200 articles on investing. As of this writing, he was long AAPL. 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. 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. Do your own due diligence and confer with your financial advisor before buying or selling any security. He can be reached at TheLibertyPortfolio@gmail.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/05/naked-put-options-growth-stocks-aapl-cmg-nflx/.

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