While the market’s volatility is giving some people the worst stomachaches they’ve ever had, options players are jumping for joy. The primary component in the pricing of options is volatility, so the more volatile the market is, the higher premiums are for options.
That means if you are trying to generate income using covered calls or naked puts, you are experiencing a great window to generate some seriously generous premiums.
Most of the time, I am happy to earn 2% for covered calls or naked puts that have expiration dates 30 days out. For blue chip stocks, I feel lucky to get 1.5%.
Lately, however, I am seeing 3% to 3.5% on many stocks, and as much as 2.5% on blue chips for both covered calls and naked puts.
Today, I’m going to focus on three naked puts where there are some generous premiums at play.
Naked Puts on Apple (AAPL)
A great go-to play for naked puts is the old standby Apple (AAPL). AAPL stock has been a great place for naked puts and options in general since it split. After all, at $700 per share, it was awful difficult to sell naked puts since you had to have $70,000 to buy the necessary amount of Apple stock if it was put to you.
That’s not the case anymore.
With AAPL stock trading around $110.15, you can sell the Oct $105 naked puts for $3.20. Not only is that just a hair under 3% returns for a 38-day holding period, or 28% annualized, but you have a $5.15 buffer before it goes down enough to be potentially put to you.
Or, if you prefer a bit more risk at having AAPL stock put to you, sell the Oct $110 naked puts for $5, or 4.5%.
Naked Puts on Ashford Hospitality Prime (AHP)
We have a very interesting situation with Ashford Hospitality Prime (AHP). This hotel REIT is on the auction block and looking for a buyer. Based on the value of its assets in the private market, and its current cap rate compared to what the private market cap rates are for hotels like those held by AHP stock, the stock should fetch at least $20.
But AHP stock is selling at $15.47. While there is no guarantee whatsoever of a buyout, or even one that is anywhere near $20, the news likely sets a temporary floor of about $15, based on how AHP stock ran up after the news.
So I would sell the Oct $15 naked puts. The price is tough to pin down because there’s not a lot of liquidity in this play, but the last sale went out at 75 cents. If you can get even 45 cents, that’s a 3% return, and you should be happy if it gets put to you.
Naked Puts on Visa (V)
Finally, it’s always worth looking at Visa (V). Although arguably a blue-chip stock, Visa has a tendency to trade with enough volatility in normal times to be worth considering for option plays.
While it is a bit expensive to just buy V stock outright, I would still be happy to own it for the long-term were it put to me.
Thus, with V stock trading around $70, you may consider selling the Oct $70 naked puts for $2.72. Yes, that’s a very generous premium amounting to almost 4% for a 38-day holding period. For whatever reason, V stock is just one of those companies that the market makes inherently volatile.
Earning a 38% annualized return by selling these naked puts is nothing to sneeze at, even if you are already a few dimes in the money. That isn’t much risk given how the stock moves on a daily basis.
Lawrence Meyers owns shares of AAPL and AHP.