With the market all in a frenzy, you have an opportunity to take a deep breath … and grab some big income via naked puts.
Naked puts are an options play whereby you sell the right for someone to sell you shares of a certain stock at a certain price on or before a certain date.
When the market is volatile, option premiums rise significantly — which means your income potential rises significantly.
I like selling naked puts against stocks I’d like to have in my portfolio — that way I’m either collecting money by not having them, or obtaining those stocks at a discount. You see, if shares are put to you, you’ll end up buying them at an effective lower price than if you just bought them outright.
And as always, remember: You need to have the available funds to buy the 100-stock lots you could potentially inherit by selling the naked puts.
Naked Puts on Apple (AAPL)
Apple (AAPL) is one stock that has been the topic of a lot of conversation. It is so big now that it accounts for a lot of the movement in the Dow Jones Industrial Average.
As of Wednesday’s close, AAPL stock closed at $109.69, and it just churned out a “death cross” on its chart — a typically bearish sign.
You could sell the Sep $109 naked puts for $3.95 — a 3.66% return for only 23 days during which the option would be open. That’s an unbelievable 58% annualized return — something I’d be very happy with if AAPL stock wasn’t put to me.
If Apple shares are put to me, I get them at an effective price of $105.05, which is about 23% below their all-time highs. That’s an incredible discount, and that doesn’t even back out all of AAPL’s glorious cash. You’d be getting GARP (growth at a reasonable price) for sure.
Naked Puts on Disney (DIS)
Disney (DIS) is another stock that was being sold off even before the market turmoil, and it is still bleeding red ink.
While I think DIS stock had gotten ahead of itself when it was trading at its all-time high of $122 earlier this month, it closed Wednesday at a very attractive price of $99.23.
As with AAPL stock, DIS stock naked puts are offering insanely generous premiums, far above what they normally trade at. In this case, you could sell the monthly Sep $99 puts for $3.50. That’s a 3.5% return for those 23 days the option would be open, or 56% annualized, which is unheard of.
If DIS stock gets put to you, you get it at an effective price of $95.50, which is 22% off its all-time high. You could even reach into the Oct $100 naked puts for $4.95 to enjoy a 4.95% return, or 38% annualized, and do very well.
Naked Puts on Chipotle (CMG)
If you are feeling like taking on a big risk, and are comfortable owning Chipotle (CMG) at its high price, you can make some very big money selling naked puts.
CMG closed Wednesday at $707.64, which is only 7% off its all-time high. Investors obviously think this is a quality company, as it only sold off to $686 in the correction.
So if you feel bold, you could consider selling the Sep $700 naked puts for $16.20. In absolute terms, getting paid $1,620 for selling these naked puts is very attractive. Recognize that it is “only” a 2.3% return for 23 days, or 36% annualized. Nevertheless, that means having CMG stock potentially put to you an effective price of $683.80, which is only slighter below where it sold off to during the correction. That may or may not give you some comfort.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he was long AAPL and DIS. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.