3 Big-Money Option Trades

options tradesThese 3 options trades are risky, but can offer nice premiums and a hedge

Covered calls and naked puts can be very effective tools to both generate income and hedge long positions in any kind of stock. For some expensive stocks, however, they can offer very high premiums if you are willing to take on some risk.

These options trades are riskier than what you’ll find in my stock advisory newsletter, The Liberty Portfolio, which aims to bring in $1,000 in premiums every month. Check it out if you’d like steadier and more conservative options trades.

Covered calls are used when you own a stock and you sell the right for another investor to buy it from you at a given strike price on a given contract expiration date. You get paid for selling that right. Naked puts, if sold, give another investor the right to sell you a given stock at a given strike price on a given contract expiration date.

Here are three big-money options trades to consider.

Big-Money Options Trades: Alphabet (GOOGL)

Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) can appear to do very little wrong. It seems like GOOGL is on its way to conquering the world.

Even though results slightly disappointed the market this past Monday, the stock only fell 3%. With over $90 billion of cash on hand, no debt to speak of, and continued advertising growth, GOOGL trades at a net-cash price of 27x trailing-12-months earnings. You could buy it right here at $966, or you could sell naked puts and try and nab it a bit lower.

The 20 Oct $900 naked puts are selling for about $11. That means, if the stock gets put to you, you’d get it at a net-cash-adjusted price of about $760. Plus you collect $1,100 now.

I also think GOOGL isn’t going to break $1,000 soon. If you own the stock, you could also sell the 15 Sep $1,000 covered calls for $11.50 and earn $1,150 right here.

Big-Money Options Trades: Netflix (NFLX)

I think you’d be crazy to own Netflix, Inc. (NASDAQ:NFLX), but I realize that many readers may hold the stock or want to consider owning it. I think it’s insanely overvalued and is burning cash left and right. But if you insist, NFLX closed Wednesday at $189, and if you own it, and you don’t care about the future possibility of a crash, you could sell the 20 Oct $190 covered calls for $12. You pick up $1,200 right now.

If NFLX gets called away, you can always buy it back. If the stock falls, you have a sizable hedge.

If you want to buy NFLX stock, or buy more, then you could sell the 20 Oct $190 naked puts for $12.70. That means you collect $1,270 right now (an instant return of 6.2%), and you come out ahead if NFLX stays above $177.80. If it keeps going up, you miss out on getting the stock, but you hold onto that huge cash payment.

Big-Money Options Trades: Chipotle (CMG)

Covered calls can also help you unwind a bad trade. Some of you out there may have bought into Chipotle Mexican Grill, Inc. (NASDAQ:CMG) at higher prices than its current price of $345. With the latest health scare, the chain is in bad need of a rebranding.

What do you do if you are sitting on a 50- or 60-point loss or more? Do you just sell and take the hit?

You can, but the company isn’t in danger of disappearing, so I think you have time to unwind the position slowly by selling covered calls. If you sell the 15 Sep $340 covered calls for $17.75, you’re on your way. Sure, the stock could soar and you’ll miss out, but that seems unlikely. Plus, you can always buy back in at $357 if that’s the case, and not miss the upside.

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. This article was originally published on July 27, 2017.

 

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