With the FANG stocks going nuts, many investors are in FOMO mode, and wondering how to get involved and enjoy the upside. Sure, one can just buy into the FANG stocks and hope that they immediately soar into profit – instead of falling by 3% as they did on Wednesday. Yet there’s the rub – risk.
One cannot buy into the FANG stocks without having quite the iron stomach. The overall stock market is vastly overpriced, and most of the FANG and other momentum stocks are in nosebleed territory.
The good news is you can use naked puts to enjoy some profit from the FANG stocks. There is still risk involved, but it can be dampened.
With naked puts, you sell the right to another investor to sell a stock to you at a given price on or before a certain date. If the stock is higher than that price, you keep the “premium” for the naked put sale but don’t have to buy the stock.
That’s the goal. If the stock falls significantly below that price, even well before the contract expiration date, you still may not have the stock put to you until expiration. So there’s time for it to come back. Here are three possible ways to play FANG stocks using naked puts.
FANG Stocks to Trade Without Risk: Alphabet
Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) may be the least risky of the FANG stocks, as it doesn’t trade at an outrageous multiple and is a fantastic business. It closed Wednesday at $1,037 per share.
One way is to keep your holding period brief, to minimize the risk of GOOGL stock moving too much. So if you sell the 8 Dec $1,020 naked puts for $5.60, you could earn $560, and in seven days, the trade will close.
Remember though, GOOGL stock could get put to you, so you’d better have the money to buy it. Or you can buy back the naked put, which would only generate a loss if GOOGL stock is below $1,014.40 on expiration.
You could also sell the 19 Jan $970 naked puts for $7. You’d make $700, and have a much wider buffer — almost 7% — before GOOGL stock could be put to you.
FANG Stocks to Trade Without Risk: Amazon
Perhaps Amazon.com, Inc. (NASDAQ:AMZN) is one of the FANG stock on your list, but its $1,161 price tag is way too high. You could execute the same strategy here.
In the near term, you could sell 8 Dec $1,120 naked puts for $5.25. That gets your $525, and you only have to hold the contract for seven days, and you have $46 worth of buffer to protect you.
If you sell the 19 Jan $1,040 naked puts for $6.65, you’ll pull in $665, give yourself a massive $127 buffer, and close out the contract before AMZN reports its earnings.
If you are very aggressive and confident that AMZN stock will stay high for a long time, you could even sell the 15 June $920 for $15.50. You’d earn $1,550.
Now, you’ll have to sweat it out for more than six months, and hope AMZN doesn’t crater to the tune of $256 per share and remain there, but aggressive traders may want to consider it.
FANG Stocks to Trade Without Risk: Netflix
Netflix, Inc. (NASDAQ:NFLX) is, to me, the riskiest play in the FANG stocks. It is outrageously overvalued, and I really worry about the bottom falling out at some point. For now, it closed at $188 on Wednesday.
You could sell 8 Dec $185 naked puts for $2.75.
That gets your $275, and you only have to hold the contract for seven days, with $3 worth of buffer to protect you — not much. Still, that’s a 1.65% return for seven days, or 60% annualized.
If you sell the 19 Jan $170 naked puts for $3.85, you’ll pull in $385, give yourself an $18 buffer, and close out the contract before NFLX reports its earnings.
If you are very aggressive and confident that AMZN stock will stay high for a long time, you could even sell the 15 June $165 for $10. You’d earn $1,000. Again, you’ll have to sweat it out for more than six months, and hope NFLX doesn’t crater by $33 per share and remain there.
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.