This week I’m looking at generating $1,000 in income from naked puts on stocks that have taken a beating lately. One of the strategies of The Liberty Portfolio is to sell naked puts on stocks that have moved into potential value territory.
Naked puts are the inverse of covered calls. With covered call trades, you sell the right for another investor to purchase 100 shares of stock from you.
With naked puts, however, you sell the right for another investor to sell 100 shares of the stock to you (that is, require you to purchase the shares) should the stock be at or below that strike price, anytime before the expiration date.
Naked puts, when sold, generate a premium. That’s money in the bank. If the stock isn’t below the strike price on expiration date, you keep the money. If it is, you are purchasing a stock that may be below fair value if you sell those naked puts against a stock you consider to be a value play.
Naked Puts: Expedia (EXPE)
German online travel firm Triviago N.V. – ADR (NASDAQ:TRVG) issued a warning today, sending shares of other online bookers lower, including Expedia Inc (NASDAQ:EXPE).
I like EXPE stock for naked puts. It is often volatile enough to create large premiums, yet there is an argument that it trades near a reasonable valuation. With FY18 EPS at $6.64 estimated, EXPE stock trades at 22X earnings on 30% EPS growth.
So if EXPE stock gets put to you, you are getting it at a valuation that is quite possibly a deal. Expedia also has $2.4 billion in cash and investments.
EXPE stock trades at $144.39 as I write, and the 12 Oct $144 naked puts currently sell at $2.90. You only need to sell two of these to pick up $580, and you are thus halfway on your “travels” to my monthly goal.
$2.90 is also a pretty solid premium, equal to about 2% return for a five-week holding period, or about 21% annualized return.
Naked Puts: Regal (RGC)
Regal Entertainment Group (NYSE:RGC), which operates thousands of Regal Cinemas has been struggling lately, as competitors issued profit warnings and Hollywood has had its worst year in 25 years.
RGC stock used to trade in a fairly tight range because box office revenues were fairly consistent. Movie exhibitors are about cash flow more than earnings growth. Debt isn’t expensive to come by, so debt service can be tended to amidst growing ticket prices, with hefty dividends thrown off.
But RGC hit a five-year low in August, and with this volatility comes a nice premium for naked puts, and possibly getting a 5.56% yielder at a bargain price.
With RGC stock currently at $15.77, you can sell naked puts at the 20 Oct $15 strike price for 45 cents each. That’s just about a 3% premium, and on a 45-day holding period, it comes to 24% annualized. Sell three contracts for another $135.
Naked Puts: Exxon (XOM)
Exxon Mobil Corporation (NYSE:XOM) is the granddaddy of integrated energy plays, and you cannot have a long term diversified portfolio without a major energy stock in it. Energy stocks have one of the best long-term track records in the market because there has always been demand for oil, and there always will be demand for oil.
XOM stock is a terrific choice these days because the market has developed a distaste for it for no good reason. I would be delighted in owning XOM in any portfolio, so if it gets put to me at expiration, I would have no problem.
With XOM stock closing Wednesday at $78.78, I would suggest selling the 13 Oct $78.58 naked puts for 95 cents. If you sell three of these, that would bring in $285, bringing you to a total of one thousand dollars.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com. As of this writing, he did not hold a position in any of the aforementioned securities.