Of all the columns I write, the one I get the most emails about are the ones where I make suggestions about easy-to-understand option plays that can bring income investors extra money each month.
That suits me fine, because naked puts are my favorite option strategy. With naked puts, you choose a stock you would like to own. You sell the right for someone else to put the stock to you, that is, force you to buy it, at a particular price (strike price) on or before a particular date (expiration date).
You collect a premium for selling that right. Now, because you want to own the stock, if it gets put to you, you are perfectly happy. You also earned money in the process that you basically apply against the purchase price. If you don’t get it put to you, you can still buy it anyway!
Let’s look at three trades using naked points to make $1,000 in monthly income:
3 Naked Puts for $1,000 in Monthly Income: iShares U.S. Healthcare Providers ETF (IHF)
Thanks to the Supreme Court, Obamacare has been upheld again, and that means another all-clear for health insurers. It means that everyone has to buy health insurance, and of course, that means the health insurance companies will have an awful lot of guaranteed business. In addition, if they get into trouble because of high claim payouts, the government will have to bail them out.
In this case, rather than choose just one health insurance company, you can sell naked puts against at ETF that holds lots of them. That’s the iShares U.S. Healthcare Providers ETF (IHF).
You can sell one of the Jul $145 naked puts for $1.80. While that’s only a 1.25% return, it’s also only for a 21-day holding period, so that’s a 20% annualized return. You also have a 3% buffer since IHF stock is already in the money.
3 Naked Puts for $1,000 in Monthly Income: IAC/InterActiveCorp (IACI)
IAC/InterActiveCorp (IACI) is Barry Diller’s conglomerate of internet businesses, which just announced that it will spin off dating site Match.com via an IPO. Diller has masterfully consolidated high cash-flow companies and sent IACI stock soaring. I think you want to own this business at some point, and if you are thinking about it, then think about selling the Aug $80 naked puts for $3.15.
You can get great premiums right now because the stock is experiencing some good volatility as a result of the Match.com announcement. By selling two of these, you’ll make $630. On a return basis, you’ll pick up a very generous 3.9% for a 56-day holding period, which works out to 26% annualized return.
When added to the IHF stock naked puts, you’ll so far have generated $810, so we need to find a nice safe play to pick up that extra $190 we need to hit $1,000.
3 Naked Puts for $1,000 in Monthly Income: Disney (DIS)
What safer play is there than Disney (DIS)? As I sit here writing, a commercial came on Disney XD for the new cartoon series Droid Stories, which takes our pals C-3PO and R2-D2 in Lego form and follows them through the crap-tastic Phantom Menace. Welcome to Disney’s merciless exploitation of LucasFilm properties!
This is how Disney rolls, and how it will roll for the next generation, and I’m not exaggerating. You want to hold DIS stock and there’s no time like the present.
Although DIS stock trades at $114.48, why not be conservative and sell one of the Aug 7 series $112 naked puts for $1.99? First of all, that takes your total naked puts sales to $1,009. Next, you’ll pick up a 1.6% return for a 42-day holding period, or 14% annualized. Finally, if DIS stock gets put to you, you can cry me a river.
As of this writing, Lawrence Meyers owns shares of IHF and DIS.