Welcome to November.
The leaves are falling and the air is getting chilly. You need to fill up your house with guests for Thanksgiving, but you could use some extra cash. That’s what selling puts can do for you.
In fact, selling naked puts is a cornerstone of the income strategy for my stock advisory newsletter, The Liberty Portfolio, which aims to net subscribers at least $1,000 per month in naked put trades.
With naked puts, you are selling the right for another investor to sell (or “put”) a stock to you at a given strike price on or before a given expiration date for your options contract. You collect a premium for selling that contract.
If the stock doesn’t close below that strike price, you keep the premium. If the stock does close below that strike price, you must either buy the stock that is put to you or buy back the naked put you sold.
Microsoft Corporation (NYSE:MSFT) has reinvented itself over the past decade, and the result is showing in its stock price. In its recent earnings report, revenue was up 12% to $24.5 billion.
Operating income was up 15% to $7.7 billion, and net income was up 16% to $6.6 billion. Diluted EPS was up 17% to $0.84 per share.
MSFT stock has a net cash position of $62 billion, free cash flow of $8.7 billion in this past quarter alone, and is trading at 26x TTM net income.
Although it trades at a PEG ratio of 1.5, after I attach premiums to its base EPS growth, its growth prospects make me comfortable with having the stock put to me here.
MSFT stock closed Wednesday at $83.18. The 1 Dec $83 naked puts are selling for $1.48 per contract. If you sell three of these, you net $444.
McDonald’s Corporation (NYSE:MCD) is another famous name executing on an exceptional turnaround. In the last quarter, MCD stock saw a 4.1% increase in U.S. comps, a 5.7% increase for the UK and Canada, a 10.2% increase in its foundational markets.
Meanwhile, its “high growth” markets — which consist of China, Korea, Russia, Poland, Italy, Spain, Switzerland and the Netherlands — offered up 6.2% comps.
The result of these blowout number pushed bottom line EPS up by 9%. I recently wrote that “I think MCD stock is a bit pricey, trading at about 25x TTM net income. However, f you plan to hold for the very long term, you could buy it here.”
Selling naked puts against stocks I am happy to own is a strategy that has served me well for a long time. Thus, with MCD stock at $166.37, consider selling two of the 8 Dec $162.50 naked puts for $1.76, or $352, bringing your total to $796.
Mastercard Inc (NYSE:MA) blew the doors off its latest earnings report. MA delivered EPS of $1.34, which was 9% above the $1.23 estimate, and 23% ahead of last year’s $1.08 per share. Net income came in at $1.4 billion, about 18% ahead of last year’s $1.2 billion.
With the exceptional EPS growth of 18% and premiums for its brand names, strong cash and investment hoard, and monumental cash flow, I could consider a 23x multiple as being a reasonable valuation for MA stock.
But its 18% growth rate means it is a stock I can push past the 1.0 PEG Ratio limit. MA is a great company with a great brand name and part of an oligopoly.
MA stock closed at $148.51 on Wednesday. Sell just one of 8 Dec $147 naked puts for $2.20 and you will have a total sale of naked puts of $1,016.
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.
