I never fully understood naked puts until 2012. Today, they are a cornerstone of my income strategy. I sell naked puts against stocks I would be happy to own while pocketing $1,000 in monthly premiums, of course.
The Liberty Portfolio, my stock advisory newsletter, uses this strategy as a way to enhance market returns and increase monthly income.
I came to naked puts because I wanted to generate income from equity positions without owning those stocks and selling covered calls against them. The downside with covered calls is you have to put your capital into those stocks by owning them. With naked puts, you don’t have to own it, you just have about 25% of the value of the stock charged against your margin account.
Just remember, if the stock gets put to you, you either have to be able to purchase that stock or repurchase the put, which could happen at a significant loss.
The Liberty Portfolio sells naked puts against stocks I have followed for a very long time. For this column, I’ve chosen three stocks of varying risk for those who may be interested.
Most regular readers of my column know that I think that Netflix, Inc. (NASDAQ: NFLX) is ridiculously overvalued. Still, it shows no signs of cratering and we are months away from its next earnings report. So you can sell naked puts here with a bit less risk than you would around earnings.
Also, NFLX stock doesn’t seem to be going down. So you can pocket some money by selling naked puts against NFLX stock.
Netflix shares closed Wednesday at $192.40. I would use a closer expiration date so as to limit the possibility that some crazy news comes out of left field and tanks the stock.
You can sell the 8 Dec $190 naked puts for $3.90. That means you hold this position for only 23 days and pull in a 2.1% return, or 32% annualized.
FirstCash, Inc. (NASDAQ:FCFS) is one of the stocks I’ve followed for a very long time. It started out as a US owner of payday loan stores and pawns hops. It sold off all of the former and became a pioneer at launching the latter in Mexico. They are the single best company at pawn operations in both the US and Mexico and has years of growth ahead of it.
It is enormously profitable, with great cash flow and low-key, focused management.
FCFS is a small-cap and that makes it somewhat volatile, leading to nice large premiums.
The stock recently broke out to new highs and closed Wednesday at $63.70. I would actually sell the 16 Mar $60 puts for $3.30. That’s a 5.5% return for a four-month holding period, and I’d be thrilled if the stock were put to me.
Southwest Airlines Co (NYSE:LUV) broke to new highs earlier this year, but is now down more than 10%.
LUV is still one of the best and most profitable airlines. It is a great operation, well-managed and with high consumer satisfaction. I’ve rarely had any problems with Southwest Airlines. It has a $3.3 billion in cash offset by only $2.8 billion in debt, which is pretty much unheard of, and increasing free cash flow.
Other than maybe one other US airline and a couple of European operations, there is no other airline stock I would even consider owning.
LUV stock closed Wednesday at $54.63. LUV has just enough volatility to make things interesting as far as naked puts go. I think the move is to just sell the 15 Dec $55 naked puts for $1.65. That’s a 3% return for one month holding period, or 36% annualized.
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 owns FCFS. 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.