With school starting back up, some investors may want some extra cash in their pockets. Who are we kidding? Every investor wants extra cash in their pockets. Naked puts are one way to use options to put a little extra bank in the bank, and I use them as part of an overall long-term diversification strategy in my stock advisory newsletter, The Liberty Portfolio.
Naked puts are transactions in which you sell a contract to another faceless investor the market pairs you with. That contract sells that investor the right to “put,” or sell, stock to you at a certain price if the stock is at or below the agreed-upon price on or before a given contract expiration date.
The cash you earn by selling the contract is called a premium.
Generally speaking, I like to target 2% to 2.5% in premium of the contract’s value for small- and mid-cap stocks. For blue chips or large-cap stocks, I’m usually happy with 1% to 1.5%. This is for a four- to six-week contract period.
Back-to-School Naked Puts: Wynn Resorts (WYNN)
Wynn Resorts, Limited (NASDAQ:WYNN) has been on a roller-coaster ride for several years, as the Chinese government cracked down on corrupt rich people just as Macau opened up.
WYNN is still a solid company, it’s still profitable and it has more than $2 billion of cash on hand. Best of all, though, it’s been in a trading range for some time. So even if the stock gets put to you, you can turn around and sell covered calls against it.
Wynn Resorts also has excellent premiums for selling naked puts. WYNN stock closed Wednesday right near a strike price — at $134.75. The 29 Sept $130 naked puts are selling for $3.
This is a great deal. Sell two of them for $600. That’s a 2.3% return for a five-week holding period, but you also give yourself a $4.75 buffer before having the stock put to you.
Back-to-School Naked Puts: Electronic Arts (EA)
Electronic Arts Inc. (NYSE:EA) is riding a wave of ever-improving technology and a focus on player experiences and has an exceptional balance sheet.
It also has tons of free cash flow, which means even if bad things happen in the near term, things should be just fine for EA going forward.
Now, with EA stock having closed at $118.18 on Wednesday, the normal move I might make is to sell the 29 Sept $118 naked puts for a whopping $4.15 per contract, or about 3.5%.
Since my goal is to get to $1,000 in contracts, however, I can take less risk selling just one 29 Sept $114 naked put for $2.60. I get $260, bringing my total to $860. It’s also a 2.3% return, but for a strike that is almost four dollars out of the money.
Back-to-School Naked Puts: AT&T (T)
AT&T Inc. (NYSE:T) is a nice, conservative play to contrast with these other naked puts. T stock doesn’t bounce around a whole lot, but I like it because if it gets put to me, I’m happy to own it and its 5% yield.
T stock closed Wednesday at $37.82. If you sell the 29 Sept $38 naked puts, you should get about 70 cents for each. If you sell two for $140, you’ll bring your total on naked puts to $1,000 even.
You may be wondering how the pending merger with Time Warner Inc. (NYSE:TWX) affects the play. The answer is: not at all. AT&T will be paying half the price in cash and half in its own stock.
If you would like to know how to make thousands of dollars selling Time Warner naked puts at very little risk, come visit me over at www.thelibertyportfolio.com.
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 but has options positions in TWX. 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.
