If you would like to earn extra income each month, you can use options to accomplish this. Many people think options are very exotic securities, and they certainly can be, but there also some very basic trades that anyone can do. One of the strategies of my investment advisory newsletter, The Liberty Portfolio, is to use options for monthly income to generate about $1000 … every month!
One of the strategies The Liberty Portfolio uses is to sell naked puts. With this strategy, you are selling the right for another investor to sell you a particular stock at a particular price on or before the expiration date of the contract. In exchange for selling this right, you earn a premium. If the stock is below that price on the day the contract expires, or perhaps significantly below it before that date, the stock will be sold (or “put”) to you.
That’s why you only want to sell naked puts on quality stocks that you wouldn’t mind holding for the very long term. Thus, should the market experience a terrible crash during this contract, and the stock gets put to you, you’re happy to hold it for the very long term and may even wish to average down.
Here are three examples of naked put options for monthly income that can add up to $1000!
Options for Monthly Income: Apple (AAPL)
A solid choice for naked puts is Apple Inc. (NASDAQ:AAPL). Apple stock is a good choice for naked puts because it is very likely to make a roaring comeback even if it falls significantly.
With AAPL having closed Wednesday at $175, and earnings not being reported until late April, you can sell the 20 April $175 naked puts for $5.10. First of all, that’s a great return for naked puts, just about 3% for a 43-day holding period, or 26% annualized.
Apple stock may very well rise as we approach earnings, so you may find you do not have the stock put to you.
That’s fine. You still keep the premium, and one contract nets you $510.
Options for Monthly Income: Visa (V)
Visa Inc. (NYSE:V) is a premier financial services stock because it belongs to an oligopoly. Between it and its very few competitors, the entire credit card processing market is gobbled up. That means that the business has a huge moat around it, and will likely deliver good growth for quite some time.
On Wednesday, V stock closed at $121.85. You have a few choices here, with earnings reported as early as April 28, you should consider selling the naked puts that expire on April 16.
The 16 April $121 naked puts sell for $1.15 each. So first, you have an 85-cent buffer before you even hit the strike price.
Second, the premium isn’t crazy good, but if you sell three of them, you net $345, bringing your total to $855.
Options for Monthly Income: Southwest (LUV)
Southwest Airlines Co. (NYSE:LUV) remains the best-managed airline company in history. It treats its employees like partners, has an incredibly consistent product, and it doesn’t sell travel – it sells freedom.
LUV stock can make for a very good choice for naked puts because LUV stock is quite volatile. It also tends to recover large losses in a reasonable amount of time, and the stock would be the only long-term hold I might ever consider in the airline business.
LUV stock closed Wednesday at $57.57. Earnings hit on April 26, so you will want to sell the 20 April $57.50 naked puts for $1.95. Just selling one of these will get you $195 and put your total at $1,050.
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 AAPL. 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 [email protected].