When it comes to options trades, you have many opportunities to take advantage of. Some can be very complex, involving multiple legs, strike prices and expiration dates. Others can be simpler, but each carries varying degrees of risk. Today, I’m going to offer what I consider three relatively low-risk options trades.
There is always some risk associated with any market transaction, but I consider these to be better choices for those with a diversified long-term portfolio. They are similar to the kinds of options trades I suggest in my stock advisory newsletter, The Liberty Portfolio, which recently launched.
That’s because in each case, the likelihood of a long-term sustained loss is not going to be all that great. The stocks I’m discussing are the kinds of securities that, if held for the long term, are very likely to recoup any short-term loss that might be associated with the options trade.
That’s the thing most option newsletters won’t tell you — that some stocks are better for options trades than others.
Options Trade: Berkshire Hathaway (BRK.B)
Because we all know that BRK stock is one of the greatest securities in history, it behooves us to find some way to get involved with the stock, short of making an outright purchase of it.
Of course, even buying one share gets expensive, considering BRK stock closed at $169.62 on Wednesday. This is but 5% off its all-time high.
BRK stock offers a couple of very reasonable choices for those interested in selling naked puts. The 28 July $170 puts are selling for $2.85. That’s a 1.6% return for a 37-day holding period, or about 16% annualized. That’s nothing to sneeze at. However, one might consider selling the 18 Aug $170 puts for $3.55.
That bumps the return up to 2.1% for a 58-day holding period, or about 13% annualized. Either works, but for the sake of reaching $1,000 in premiums, we’ll sell two of the August puts for a total of $710.
Options Trade: Apple (AAPL)
A lot of investors probably own Apple Inc. (NASDAQ:AAPL). The stock has had a great run this year, and while there may be more upside ahead, I think there’s an opportunity to use options here. Consider selling covered calls for the stock that are significantly out of the money.
Doing so creates less risk AAPL stock will get called away, and you can always buy it back at the same price that it gets called away at. AAPL stock closed at $145.87. You can sell the 21 July $150 covered calls for $1.35. In doing so, you get a middling return of 0.85% for a 31-day holding period or about 10% annualized.
However, expiration comes the week before AAPL reports earnings, so chances are you won’t miss out on any big moves. Plus you have a wide buffer before the stock even gets called away. Sell one of these for $135, bringing your total to $845.
Options Trade: McDonald’s (MCD)
McDonald’s Corporation (NYSE:MCD) is going through a very successful turnaround. After languishing for several quarters, many analysts were counting MCD out.
When MCD fired its CEO and brought in its European operations guy to run the show, he did what people thought was impossible — he reimagined the menu yet still managed to keep McDonald’s what it has always been. It took vision, and he delivered.
As far as that goes, MCD stock closed at $153.73 on Wednesday. You can either sell a naked put or covered call in this situation. You can sell the 21 July $152.50 naked puts for $1.64. If you sell one of these, your total for all premiums comes to $1,009.
Alternatively, you can sell one of the covered calls. This one has a bit more of a buffer zone available. The 21 July $155 covered calls are selling for $1.74, bringing your total to $1,019.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. He also is the Manager of the Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.