Naked puts are a form of options trading that are generally used if you are bullish on a given set of stocks. With these trades, you sell the right but not the obligation, to another investor, to “put,” or sell a stock to you, at a given strike price, on or before the contracted “expiration date.”
The good news is that should the stock not close below that contracted strike price, then you will keep the money you made from selling the contracts on those naked puts.
Now, normally my column is about generating some additional monthly cash. Indeed, with my stock advisory newsletter The Liberty Portfolio, I prefer to use them to generate up to $1,000 in monthly income.
However, I get emails from time to time from people seeking really sizable premiums for selling naked puts. They want to land a very large cash contract and are willing to take the risk of having a stock put to them. So this column is for investors comfortable with more risky stocks and higher premiums.
Naked Puts: Alphabet (GOOGL)
Alphabet Inc (NASDAQ:GOOGL) is a relatively safe choice against which to sell naked puts. Although I do not like that GOOGL’s entire business is essentially generated from advertising, that’s how it is, and it does that job very well.
GOOGL closed Wednesday at $950, but with $167 per share in net cash, it has an effective net-of-cash price of $783, or about 28x TTM net income. Considering net income is growing at over 30% annually, I consider that to be a bargain price. Therefore, should GOOGL stock get put to you, I believe you are obtaining it at a value price. So by selling naked puts, should it get put to you, you are getting it at an ever better price.
The 17 Nov $875 naked puts sell for $10. That’s $1,000 right there and a 1.1% return./ Should you be forced to buy it, you will buy it at a net cash-adjusted price of $865.
Naked Puts: Amazon (AMZN)
Amazon.com, Inc. (NASDAQ:AMZN) is the next step up in risk. AMZN remains an amazing company, and while difficult to value on a PE basis, the market seems to be routinely comfortable with an erratic bottom line, and instead values it based on exceptional cash flow.
I think even if AMZN were considered to be insanely overvalued, and were to crash after having the stock put to you, patience will be rewarded. I think AMZN stock has a long way to go on the upside.
AMZN closed Wednesday at $1,000 on the nose with about $28 per share in net cash. You can hedge by a full 100 points if you sell the 17 Nov $900 naked puts for $11. You make $1,100 right now, and if the stock is put to you, you’ll get it at a net cash adjusted price of $861 – a full 14% lower than it is today.
Naked Puts: Regeneron (REGN)
Regeneron Pharmaceuticals Inc (NASDAQ:REGN) is by far the riskiest naked puts play in today’s column. This is a volatile stock that in the past year has whipsawed from a low of $325 to a high of $543. It just closed at $438 per share, and with $16 per share in net cash, it has a cash-adjusted price of $422. There is some technical support at the 200-day moving average at $421. So I would sell naked puts that are below the threshold.
The17 Nov $400 naked puts are selling for $10. So you can pick up $1,000, representing a 2.5% return, or about 15% annualized. If REGN stock gets put to you, you get it at a net-cash-adjusted price of $390. It is trading at about 4ox TTM earnings, but welcome to biotech.
If put to you, and you are suddenly uncomfortable, you can always sell covered calls against it and perhaps make some more cash while waiting for the stock to recover. Just remember, this stock is very volatile and very risky.
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.
