There’s an advantage to selling naked puts rather than selling covered calls. You do not have to own the underlying stock to sell naked puts whereas you must hold the stock if you sell covered calls.
Let’s quickly review how things work with naked puts. In this trade, you sell the right, but not the obligation, for someone to sell the chosen stock to you at a given strike price on or before the contract expires.
What I like about naked puts is that you can use the capital you might otherwise have used to buy the stock and sell calls against it to perform another trade until expiration arrives.
If you combine a few naked puts trades, you can diversify exposure and generate extra income each month. With these three trades, you can generate $1,000 in options premiums.
Naked Puts to Sell: Dollar Tree, Inc. (DLTR)
Dollar Tree, Inc. (NASDAQ:DLTR) is back on my radar. The company has absorbed the Family Dollar purchase better than I expected, and the stock and company are responding quite well. This was a dicey proposition, but it has created a dollar store powerhouse that I believe will perform well regardless of how the economy does.
DLTR tends to provide generous premiums because it has a good deal of volatility. It also is a stock that I am delighted to own should the stock get put to me.
DLTR stock closed Wednesday at $98.12. The Sept. 16 $97.50 puts sell for $3.15, which works out to $315 for 100 shares. I can sell two of these naked puts and generate $630. That, by the way, is a 3.2% return for a 37-day holding period or about 32% annualized. You also have a 62-cent buffer between the Wednesday’s closing price and strike price, so that gives you a little breathing room.
Naked Puts to Sell: Walt Disney Co (DIS)
Investors were nonplussed with earnings from Walt Disney Co (NYSE:DIS). As I wrote following that report, I think Disney is fairly valued at $95, so having it put to me in the vicinity of Wednesday’s closing price of $97.86 is not the end of the world. I even think getting it at a cheaper price would be a great thing, because DIS is a long-term core holding for any investor’s portfolio.
The goal here is to first generate that $1,000 in naked puts, but if I can combine that with a move that gets me Disney stock at a really great price should it be put to me, so much the better.
I think you may want to consider selling the Sept. 23 $95 naked puts for a dollar. Sell two of them, and you earn $200, bringing you to a total of $830. That’s just a 1% return, but perfectly acceptable.
Naked Puts to Sell: Starbucks Corporation (SBUX)
Finally, we have Starbucks Corporation (NASDAQ:SBUX). Like DIS, I think SBUX stock makes a great core holding. It isn’t in “explosive growth” mode, but SBUX has a tendency to ebb and flow. That means now is a good time to sneak into the stock while it’s somewhat out of favor.
Plus, SBUX has a brand that can’t be beat at this point. Not only is the business in good shape, but it generates solid cash flow and has a fine balance sheet that acts like a fortress in an economic downturn. So, yes, if the stock is put to me, I’d be delighted to add more of it to my portfolio. I own it, as I do shares of Disney, because these are probably the greatest consumer brands in a select group.
SBUX stock trades at $55.62. The Sept. 16 $55 puts are selling for 85 cents. Sell two of them for $170 and crack that $1,000 point.
As of this writing, Lawrence Meyers was long DIS and SBUX.
