Ho ho happiness! What could be better than money in your stocking for the holidays?
Don’t expect “naked puts” to mean that Santa fills stocking while not wearing his red suit! Instead, naked puts are simply an options trade that means selling the right for someone else to put a stock to you (i.e., force you to buy it) at a strike price you choose on an expiration date of your choice.
For this article, I’m going to use expiration dates on or around Christmas. If you are hoping you can sell the right to naked puts and collect the premium, then not have the stock put to you, go ahead and use that money for Christmas presents. Then again, maybe the stock will get put to you — that’s actually your Christmas present.
It all depends on how you feel about the given stock that you are selling that right about.
Naked Puts on Apple Inc. (AAPL)
Personally, I expect Apple (AAPL) to have a very strong holiday season. That is particularly encouraging not only for Apple stock shareholders, but for those who would like to collect some premium by selling naked puts against AAPL stock.
You have a few choices here, but I’m eyeballing the Dec. 24 $119 naked puts. You can sell these for about $2.95. That’s a pretty nice premium of 2.5% for a 31-day holding period, which translates to an annualized return of 30%.
Alternatively, if you are being more aggressive, AAPL stock has been on a roll recently and I think it could challenge its old high of $134. The Dec. 24 $125 naked puts are selling for $6.62. If AAPL stock is not put to you, you’ll pick up a hefty 5.5%, which is astonishing for a 31-day holding period. However, you assume it will keep rising — and in that case, if it gets put to you at $125, the effective buy price is $118.38.
Naked Puts on Walt Disney Co (DIS)
I feel the same way about Disney (DIS). I expect a blockbuster quarter both for Q4 and again for Q1. This is due to the monster hit that the next Star Wars film is going to generate. Right now, DIS stock is near its all-time high of $122, trading around $120. I think the market has priced in some of this success, but not nearly all of it.
I think selling the Dec. 24 $120 naked puts are a slam-dunk. Barring some kind of unexpected disaster, I just don’t see DIS stock trading below $120 by Christmas Eve. You’ll pick up $3 in premium, which is a 2.5% return for 31 days. Just like AAPL stock, this gives you a 30% annualized return on DIS stock.
The Dec. 24 $124 naked puts are selling for $8.35. I’m not as certain about these, but if you make the play, it’s a 6.7% return.
Naked Puts on Comcast Corporation (CMCSA)
I think it’s worth taking a look at Comcast (CMCSA) for selling naked puts. The idea that it might invest in Hulu is going to give the stock a boost, and cable continues to do pretty well. It is also moving big time into streaming cable service.
I don’t necessarily see big moves here, but the premiums are a bit more conservative for those seeking something a little safer.
CMCSA stock trades at $62.90. The Dec. 24 $62.50 naked puts sell for $1.38. That’s a 2.2% premium — just a bit lower than its peers above — but still translates to an annualized return of 26.4%. That’s a very attractive and respectable play.
In addition, you have a 40-cent buffer on the downside before the stock is potentially put to you.
This one may depend on how the broader market delivers in the final month of the year.
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.