Naked puts are options trades in which you sell the right — but not the obligation — to another investor to have a stock sold (put) to you at a certain price on or before a given date. In exchange for selling this contract, you make money. You hope the stock will close above that certain price (strike price) on the expiration date of the contract. If it isn’t, then you be forced to either buy the stock at that price, or repurchase the option contract.
Some stocks pay very large premiums based on volatility, stock price and length of the contract. That’s what I’ll cover today, although these are high-risk trades that carry high rewards.
My stock and options advisory newsletter, The Liberty Portfolio, is more conservative and aims to generate $1,000 per month in premiums.
High-Risk, High-Reward Puts: Priceline (PCLN)
Priceline Group Inc (NASDAQ:PCLN) is an expensive and volatile stock, which leads to big premiums. However, PCLN as a company is doing very well, is in good shape financially and even in its worst moments always seems to climb back.
PCLN has $10 billion in cash and investments, and that equates to $200 per share. Thus, the business itself is valued at $1,624 per share. With EPS pegged at $83 per share this year, and growing at 15% annually, fair value might be around $1,250. It might be even higher since this is a growth stock. Giving a 10% premium for brand name, cash flow and cash position, fair value might be about $1,625 as well.
The 20 Apr $1650 naked puts are selling for $30. That means you collect $3,000 now, and if PCLN stock stays above $1,650 on or before April 20, you keep the money. If it falls below, you get the stock sold to you at that price.
High-Risk, High-Reward: Amazon (AMZN)
Amazon.com, Inc. (NASDAQ:AMZN) is conquering the world, as we know. Its stock is arguably way overvalued. Yet nobody seems to care, and I think AMZN stock may be one of these stocks that you can hold for thirty years. So while I wouldn’t love buying it here at $1,204 per share, I would mind if it were put to me at a lower price and picked up a premium selling a naked put option in the process.
You have many choices here. If you want to take on less risk, consider selling the 20 Apr $1,070 naked puts for $16, or $1,600 in cash. If put to you, you get the stock at the equivalent price of $1,054 per share.
If you want to be aggressive, considering selling the 20 Jul $1,100 naked puts for $41. Yes, that means you collect $4,100 now. If Amazon falls below $1,100 — and that could very well happen between now and July — you would have the stock put to you at the equivalent price of $1,059.
High-Risk, High-Reward Puts: Alphabet (GOOGL)
Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) sits on a whopping $293 per share in cash. GOOGL stock closed Wednesday at $1,091, thus the business itself sells for $800 per share or about 19x FY18 earnings. With 20% annualized long-term growth, GOOGL is arguably selling at intrinsic value now. Indeed, business is just going gangbusters, and there is no slowdown in sight.
If you want to take on less risk, consider selling the 20 Apr $1,000 naked puts for $12, or $1,200 in cash. If put to you, you get the stock at the equivalent price of $988 per share, below intrinsic value.
If you want to be aggressive, considering selling the 15 Jun $1,050 naked puts for $36. Yes, that means you collect $3,600 now. If GOOGL falls below $1,050 — and that could very well happen between now and June — you would have the stock put to you at the equivalent price of $1,014, below current intrinsic value.
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 23 years’ experience in the stock market, and has written more than 1,800 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
