The most frequent email question that I get is “how can I generate more monthly income from my portfolio?” There are many answers to that question, and I always reply that this question cannot be answered in a vacuum. All investors must take into account their entire long-term investment goals — and more importantly, their risk profile — before making any kind of investment decision.
However, one of the strategies I use in my monthly investment advisory newsletter, The Liberty Portfolio, to generate additional monthly income, is to sell naked puts.
This is an option strategy in which you create a contract through your broker with another investor. With this contract, you sell the right for another investor to sell (put) a given stock to you, at a given strike price, on or before a given contract expiration date. In exchange for selling this right, you generate money, in what is known as a “premium.”
If on or before the date of contract expiration, that stock is below the agreed-upon strike price, you will have that stock put to you. In other words, you will be forced to either buy the stock at the strike price, or unwind the trade by buying back the option.
The Liberty Portfolio aims to generate $1,000 each month using this strategy. However, The Liberty Portfolio does not just sell naked puts on any old stock. It sells naked puts on stocks that I consider to be undervalued. Thus should the stock get put to the Portfolio, I’m more than happy to own it for the long term.
Here are three examples of the types of stocks The Liberty Portfolio might sell naked puts against, depending on circumstances.
Naked Puts for $1,000 Monthly: Dollar Tree (DLTR)
Dollar Tree, Inc. (NASDAQ:DLTR) is probably the nation’s leading dollar store chain. The market didn’t care for its recent earnings report and sold DLTR stock off quite a bit. I thought the selloff was way overdone and made DLTR into a value play. Dollar Tree is well positioned, with solid financials and a business that does well in a good economy and does fantastic in a bad economy.
The stock closed Wednesday at $92.81. There is a very compelling naked puts trade to make by selling the Apr $92.50 naked puts for three dollars per contract. If you sell two of these you will generate $600. This is a very generous return of 3.25% for a 37–day holding period.
Naked Puts for $1,000 Monthly: Disney (DIS)
Walt Disney Co (NYSE:DIS) is significantly off its 52-week high, and recently sold off on news that Comcast Corporation (NASDAQ:CMCSA) put in a rival bid for Sky TV. The selloff makes no sense to me. Disney is a terrific company which is only going to become more robust in terms of its content offering after its merger with Twenty-First Century Fox Inc. (NASDAQ:FOXA) is consummated.
If you don’t already own DIS, or if you think you may want to purchase additional shares, I consider Disney stock to be a pretty good value at the present time, especially if you have a very long-term investment horizon.
Disney stock closed Wednesday at $103.90. The 13 Apr $104 naked puts are selling for $2.10. If you sell one of these you will collect another $210, for a total of $810 so far.
Naked Puts for $1,000 Monthly: Coca-Cola (KO)
The Coca-Cola Co (NYSE:KO) has really struggled over the past few years as the world has moved away from sugary drinks to healthier alternatives, such as sparkling water. As a result, Coke’s revenues and net income have been hurt pretty badly, but it still remains a cash flow generator, pays a good dividend and just made a big splash by announcing it was moving into alcoholic drinks. I think this is a great move for Coke, I think it will make it competitive again, as it also moves away from sugary drinks.
Coke stock closed Wednesday at $43.78. If you sell three contracts of the 13 Apr $44 naked puts for 75 cents each, will generate another $225 for your income target, bringing your totals to $1,035.
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 DIS and DLTR. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.