For many years, the way I generated income from option trades was to sell covered calls against a certain set of stocks. But there was a major downside to this approach.
Selling covered calls meant I had to spend untold thousands on the stock(s) I wanted to sell calls against. These weren’t always stocks I held in my long-term diversified portfolio, so it depleted my cash stockpile. It also prevented me from buying and holding all the stocks I wanted.
Then I discovered selling naked puts. This would result in the same net effect of earning good premiums but without having to put up all the cash to buy the stock. With a naked put, you sell the right to another investor to sell you a given stock at or below a certain price on or before a certain date.
So, I would only have to put up money if the stock got put to me via the naked puts. But (and you’d be wise to note this) I did have to have enough cash and/or margin available to cover the purchase in the event the stock did get put to me.
Here are three naked puts that look good for a grand in premium right now:
Naked Puts on Apple (AAPL)
Apple Inc (AAPL) has proven to be a good stock to sell naked puts against. The whole idea of selling a naked put is you don’t mind if the stock gets put to you. You either hold it already and want to add, or you want to get in.
I happen to hold AAPL stock already, but I’d be delighted to buy more.
As I write, AAPL stock trades at $109.40. The Dec. 5 $108 naked puts are selling for $1.92. That’s a 1.75% return for a 32-day holding period, or a 20% annualized return. In addition, you have a $1.66 hedge before the put would even be triggered. I can’t say for sure, of course, but I suspect AAPL stock will be well above this level come Dec. 5, after the company tells us that holiday season shopping is going bananas.
Sell two of these for $384 total.
Naked Puts on Starbucks (SBUX)
The market got a little annoyed at Starbucks Corporation (
SBUX) for a revenue miss last week. I just see it as an opportunity to buy in at a good price, and naked puts make great sense here. The stock presently trades at $76.10. The Dec 5 $76 naked puts sell for $1.65.
This is what I love about SBUX stock options — they tend to have really good premiums. This one nets you a 2.17% return for the 32-day holding period, or 24.5% annualized. That means that even if SBUX stock gets put to you, it gets put to you at an effective buy price of $74.45. That’s a great price for SBUX stock.
Sell two of these for $330, bringing your total to $714.
Naked Puts on DirecTV (DTV)
Finally, we have the mystifying DirecTV (DTV). The AT&T (T) buyout price for DTV stock was $95, yet here it languishes at $87.29. The market still thinks there’s a chance the buyout won’t go through, and every source I’ve spoken to says it will.
I think it will, which is why I’ve been repeatedly selling naked puts. I’m happy to take DTV stock at any price below $95 because it’s a near-certain think I’ll get paid $95 for it in the spring.
Sell the Dec 20 $87.50 put, but watch the bid/ask, which is a bit wonky right now. The spread is huge at a $1.37 bid but a $2.15 ask because of the merger uncertainty. I would put in a limit order near the ask and ratchet down, but don’t go lower than $1.75. You deserve a 2% return.
Sell two of these, and that takes you to $1,064 — a comfortable grand and a little change.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of , which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has and . Contact him at pdlcapital66@gmail.com and follow his tweets at @ichabodscranium.
