As earnings season kicks off, stocks can pick up in volatility. Especially as investors try to game stocks before and after earnings reports. That means there will be chances to generate income from naked puts, and make more than usual via more generous premiums.
Of course, you must have the risk tolerance to sell naked puts on these particular stocks. The stocks I choose to use options with in The Liberty Portfolio are geared to generate less income, but also with less risk.
As a reminder, selling naked puts sells someone else the right to essentially sell a stock to you at a given price on a given date.
This is one way I like to generate additional income from my portfolio, but without the risk of actually holding the stock. Of course, should the stock get put to you, you’d better actually want to own it.
Naked Puts on Wynn Resorts (WYNN)
It has been a lousy few years for casino stocks with a presence in Macau. Wynn Resorts, Limited (NASDAQ:WYNN) has really been in trouble over there, along with everyone else, as the Chinese government continues its crackdown on corrupt rich people.
The Chinese chose to do this because, with 2 billion people to mollify, it cannot appear as coddling the corrupt and the rich. Thus, with fewer rich people eager to flash their cash, the casinos got gobsmacked. WYNN stock is really a trading stock to me, and not a long-term investment. Still, with the stock well off its all time highs at $133.17, there is plenty of upside (and limited downside) if you buy in here.
The premiums are fantastic right now, and I might think about selling the 25 Aug $133 naked puts for $6, if you can get it. That’s a generous return of 4.5%, or 45% annualized.
There is downside to WYNN, and sure, it could crater back down to $60. However, I think the worst of the crackdown is over. WYNN doesn’t always say when it reports earnings, but it is usually the first week of the second month of the quarter.
Naked Puts on Priceline (PCLN)
Priceline Group Inc (NASDAQ:PCLN) has historically been a stock where I aim to make very large premiums. You can make several thousand dollars provided you have the margin available to sell a naked put against PCLN stock.
PCLN stock is trading at $1,875, after backing out net cash, or 22 times next year’s earnings. Its earnings per share are growing at a rate of 17.6% annualized, so I consider this to be a reasonably priced growth stock. So getting PCLN stock put to you at a lower price would be wonderful.
You can sell the weekly 25 Aug $1,800 naked puts for $10.50, and collect $1,050 in premiums for income. It sounds too good to be true, but you pick up a thousand bucks, and if the stock is put to you, you get it at a nominal price of $1,790. Backing out net cash, you get it at $1,665, which is about 19.5 times FY18 earnings.
PCLN reports earnings on Aug. 8.
Naked Puts on Southwest Airlines (LUV)
Southwest Airlines Co (NYSE:LUV) remains one of the top two airlines, as far as financial health is concerned. LUV has always been the best-managed airline with the best financials, best cash flow and least amount of debt.
As an airline stock, it also means that LUV stock has the right degree of volatility to sell naked puts against it to make some additional income. If LUV stock is put to you, you get a premier airline at a discounted price from its close of $61.41 on Wednesday.
Earnings will be reported next week, on July 27. With the stock at $61.41 now, the play here is probably the 25 Aug $61 naked puts for $1.80. This works out to a higher-than-average return of about 3%. For the 36-day holding period, that bring you to a 30% annualized return.
LUV stock is also barely 5% off its all-time high. It remains a strong stock and may even be worth buying at these prices.
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.
