There are pros and cons to earnings season when it comes to using option trades like naked puts. For starters, earnings season usually means bumped-up volatility in some stocks, which translates to higher premiums. That means that selling naked puts yields higher income per trade in many cases.
The downside is that you need to be careful about making sure your option trades expire before the earnings date of your stock, because it could swing wildly in any direction, and possibly against you. Either do that or set a date well beyond earnings.
I don’t like selling puts close to earnings. That may be fine for some people, but in The Liberty Portfolio, the goal is to collect $1,000 in monthly premiums and not have the stock put to you — although if it is, it’s a stock The Liberty Portfolio is happy to own.
Naked puts, specifically, are trades in which you sell the right for another investor to put, or sell, a stock to you at a given price on or before a given date. If the stock falls below that price, it gets sold to you. With that in mind, here are three naked puts to consider.
Selling Puts: Southwest (LUV)
Southwest Airlines (NYSE:LUV) has returned more than 40% to investors over the past year but is about 10% below its high. LUV is still one of the exceptional airlines as far as profits go. It continues to boast an impressive set of financials, and is solid as far as cash flow and relatively low debt. It remains a great brand and great company.
You could certainly buy LUV stock here if you intend to hold for a very long time. Otherwise, why not make some money?
LUV stock closed Wednesday at $58.38. You have two approaches based on the earnings date of Oct. 26. The 20 Oct $58 naked puts sell for $0.90, and if put to you, then you get LUV stock at the equivalent of $57.48.
However, I prefer going out a bit. The 17 Nov $57.50 naked puts are selling for $1.75. You earn a 2.9% return for a 43-day holding period. Sell three of these for $525.
Selling Puts: IAC/InterActiveCorp (IAC)
IAC/InterActiveCorp (NASDAQ:IACI) is the one and only internet conglomerate cobbled together by the great Barry Diller. IACI has had a fairly consistent strategy, not unlike that of John Malone at Liberty Media. Buy up cash-flowing internet assets, and build them out.
IACI has been on a tear, doubling off its low about a year ago to $122.43. Cash flow is solid if not spectacular. It’s a great company with lots of volatility, so it makes for a great addition to naked puts for trading.
IACI stock appears to report earnings in late October. You could sell the 20 Oct $120 naked puts for $1.45 here, and that’s only a 16-day holding period. I’ll take that 1.2% return, which comes out to over 24% annualized.
Sell two of these for $290, bringing the total to $815.
Selling Puts: MasterCard (MA)
Finally, I always like to go with the credit card companies. They are part of an oligopoly and have a lock on the massive market share of ever-increasing credit card transactions. Of the two, I prefer Mastercard Incorporated (NYSE:MA) because it offers the higher premiums.
MA has almost $10 billion of cash on hand, or about $10 per share, so that actually takes its valuation down to about 36x earnings. It is rather expensive for my taste, but if one is willing to hold a very long time, then I’m okay having the stock put to me.
Also, considering that the five-year annualized growth rate is pegged at 17%, I am willing to pony up more than normal for this great growth stock. The stock is trading at $142.09.
With earnings coming on Oct. 31, you can sell the 27 Oct $142 naked puts here. You can sell just one for $2.15. That will bring the total of all three trades up to $1,030.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at http://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 [email protected]