The strategy of selling naked puts for extra income works better in bull markets than in bear markets, but it still has a place in the latter.
With naked puts, you are selling the right for another investor to sell a certain stock to you at a given strike price on or before a given expiration date for the contract. It’s a cornerstone of my options strategy for my forthcoming stock advisory newsletter, The Liberty Portfolio.
If the stock price doesn’t close below that strike price on or before expiration, then you get to keep the premium that you earned for selling the contract. Actually, you’d keep it even if the stock fell below that strike price, but you’d also have to buy that stock. The key to this whole naked put strategy, of course, is that you want, or don’t mind having, that stock put to you.
Here are three naked puts trades to generate $1,000 in cash for you over the next month or so.
Naked Puts: Icahn Enterprises (IEP)
Right now, Icahn Enterprises LP (NYSEARCA:IEP) is toward the lower end of a long-term trading range. I think it’s a good time to get in, because Carl Icahn is the greatest investor of all time — even greater than Warren Buffett.
It’s very difficult to value IEP stock, because it’s essentially a bunch of diversified equity and distressed debt holdings. That’s why I look at IEP stock in terms of long-term trading ranges and I’d be delighted to get it here at $53 (with the stock having closed Wednesday at $55.49).
Consider selling the 21 April $55 naked puts for anything over $2.70, which is what I’ll assume you get for your sale. Sell two of these for $540, and earn a solid 5% return for six weeks.
Naked Puts: Mastercard (MA)
Mastercard Inc (NYSE:MA) is arguably undervalued at Wednesday’s closing price of $112. With next year’s earnings pegged at $4.96 per share, and backing out the $5 per share in net cash MA stock has, the stock trades at about 21.5 times earnings.
Earnings growth is projected to be about 15% annualized over the next five years, and I add a 10% premium for brand name, cash position and free cash flow. You can get a fine set of naked puts here by selling the 7 April $112 naked puts for $1.95 each. If you sell one of these for $390, you now have a total of $930. That’s also a 1.8% return for a five-week holding period, which translates to about a 19% annualized return.
If MA stock gets put to you, then you also end up owning one of the premier financial services companies in the world.
Naked Puts: Starbucks (SBUX)
Finally, I always like to take a close look at Starbucks Corporation (NASDAQ:SBUX), because it tends to offer good premiums for naked puts, and because having SBUX stock put to me is hardly the end of the world.
Yes, right now, the company is transitioning to what I believe will be a new and even more improved company, but the market hasn’t been terribly upset with the stock. In fact, it’s been in a pretty tight trading range for awhile, which I like when dealing with naked puts.
SBUX stock closed Wednesday at $57.14. You can sell the 31 March $57 naked puts for 85 cents. If you sell one of these, you generate $85. That brings you to a total for all three trades of $1,015. For this particularly sale, the return is 1.5%. That for a mere four-week holding period, so it translates to 19.5% annualized.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, 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.
