Here we are in September, and that means nothing is really happening with respect to earnings. The good news is that this is a good time to use naked puts, since earnings reports won’t mess up your plan. The bad news is that volatility isn’t quite as high, so premiums aren’t, either.
Still, some stocks have a good deal of volatility naturally, so that leaves us with plenty of good opportunities to sell naked puts.
Now, let’s just review naked puts. You sell the right, but not the obligation, for another investor to sell the stock to you at a given price on or before a given date.
So, if someone puts the stock to you, then they are selling the stock to you at that price, and you are required to either buy the stock or buy back the naked put.
Portfolio Hedge: Visa (V)
Visa Inc (NYSE:V) is a good company, a good stock, and while it is a bit pricey these days, the market lull makes it a good stock to sell naked puts against. Thus, I’m happy to own it long-term if it gets put to me because stocks that are part of an oligarchy are always welcome in my portfolio.
V stock also broke out to new all-time highs, at $83.24 as of Wednesday’s close. Stocks that break to new highs tend to remain above that breakout point, but not always. So that’s another reason for a good naked puts play.
The Oct. 14 $83 naked puts are selling for $1.35. That is only a 1.6% return for a 36-day holding period, or 16% annualized. Still, it’s a reasonable return in this market. If you sell three of these, you’ll generate $405 in income.
You also have a small little 24-cent buffer before going into the money.
Portfolio Hedge: Southwest Airlines (LUV)
Southwest Airlines Co (NYSE:LUV) is a favorite play with naked puts, as well. This is probably the most solid airline financially, and it seems to do just fine no matter what gets thrown at it. Even recent labor disputes don’t seem likely to break the airline’s hold on its business model.
Since Southwest reports earnings on Oct. 26, you get to sell naked puts for Oct. 21, so you won’t get caught in any earnings surprises. LUV stock is also off its all-time highs, but only about 10% off its low for the year, so it’s a good time to sell naked puts.
LUV stock closed at $38.68 on Wednesday. I would consider selling the Oct. 21 $38 naked puts for $1.10. To begin with, you have a 68-cent buffer before the stock goes into the money.
Then, you pick up a very generous 3% return for a 43-day holding period, or about 30% annualized. Sell two of these for $220, bringing your total to $625.
Portfolio Hedge: Wynn Resorts (WYNN)
Wynn Resorts, Limited (NASDAQ:WYNN) has seen some optimism regarding Macau gaming this year, and stock has rebounded off its low in the $50s. It’s in a trading range now between about $88 and $101. WYNN stock closed Wednesday at $94.35. This is probably the riskiest of the naked puts, but it also pays well for that risk.
The Oct. 14 $94 naked puts sell for about $4.30. That’s a fantastic premium of 3.6% for 36 days, or 36% annualized. Plus, if it gets put to you, you have effectively purchased WYNN stock at close to the bottom of its trading range. WYNN has proven to be a great trading and options stock given its volatility and range-bound behavior over the past two years.
If you sell just one contract, you’ll have total income from naked puts of $1,055.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.