One of the benefits to selling naked puts over covered calls is that you don’t have to put up the capital to buy a stock against which to sell covered calls.
However, you must have margin available equal to about 35% of the total amount of the purchase in order to sell naked puts. So you can thus keep the capital to deploy for other purposes.
Also, I reserve naked puts for stocks that I would not mind holding for the long term if the stock gets put to me. I prefer to just trade the stock, but I only sell naked puts on those stocks that, should the stock fall on its own or as part of a crash, I am comfortable holding.
In using this strategy, which is a cornerstone of my stock advisory newsletter, The Liberty Portfolio, I aim to generate a thousand dollars a month in additional income.
Naked Puts on Anika Therapeutics (ANIK)
Biotechnology stocks not only can offer large capital gains if their products succeed, but they can also can offer large premiums for naked puts. Anika Therapeutics Inc (NASDAQ:ANIK) is unlike most biotechs in that it has fairly established products and is aiming to produce even more.
Anika Therapeutics has therapies that both repair joints below the waist, as well as relieve the terrible pain that can come along with issues in those joins. Currently, ANIK has a product set that is well-diversified and is still growing.
ANIK stock closed Wednesday at $49.82. There is not much volume on these, but you should be able to squeeze out about $2 for the 18 Aug $50 naked puts. I would sell one of those for $200. That’s a 4% return even if the stock isn’t put to you, and almost 32% annualized.
Even better, if ANIK stock is put to you, then you’ll get it at an effective price of $48, which I think is undervalued.
Naked Puts on Visa (V)
Visa Inc (NYSE:V) is probably a good stock to take a very long look at as far as holding it in a long-term diversified portfolio. Because it holds a large market share as a credit card processor, and is really part of an oligopoly, we can be fairly certain it will be around for a long time.
Visa stock is also volatile enough that it often offers some generous premiums. I try to target about 2% or so for any naked puts.
V stock is trading at $94. The 18 Aug $95 naked puts are trading for $2.90, which is far and above my target, and actually represents a 3% return for a 44-day holding period, or 24% annualized.
Should V stock get put to you, you can certainly hold onto it. However, you may also desire to just sell covered calls against it and earn additional income. Regardless, if you sell two of these for $580, you’ll be at $780 total so far.
Naked Puts on Wynn Resorts (WYNN)
Wynn Resorts, Limited (NASDAQ:WYNN) goes through fits and starts as far as its stock is concerned. Recent upbeat news about Macau has the stock higher than it has been in a long time, and closed Wednesday at $132.42.
I think WYNN as a trading stock, rather than something I might own very long term. However, it has very long-term cycles and I think we have more than 100 points on the upside to go over that very long term.
So I’d be happy to sell some naked puts on this in the meantime. If the stock is put to me, then I can sell covered calls or hold it and be patient. If it is not put to me, I may be able to sell another round next month.
In the meantime, by selling the 18 Aug $132 for $415, and selling just one of them, you’ll end up with a grand total of $1,195 in naked put premiums.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own 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.
