3 Naked Puts For $1,000 In Extra Monthly Income

naked putsEarn $1,000 this month by selling these naked put contracts

Retired investors and income investors are always looking to generate additional income from their portfolio. The prevailing wisdom is to invest in bonds and dividend stocks. However, both of these asset classes carry more risk than most people think that they do. Many dividend stocks are currently overvalued. With bond yields rising, it means that bond prices are falling. You don’t want to get involved with too many of these.

The Liberty Portfolio, my investment advisory newsletter, generates income a different way. The Liberty Portfolio sells naked puts against specific stocks. These are stocks that I either feel are undervalued, or may work as core long-term holdings.

With naked puts, you are selling the right for another investor to sell, or put, a given stock to you at a given strike price on or before a given contract expiration date. In exchange for selling the right for the investor to do this, you collect cash, known as a premium. Should your chosen stock close below that strike price on the expiration date (or perhaps fall significantly below the strike price before the expiration date), you will be forced to buy the stock. Alternatively, you can always exit the position any time by simply buying back the contract. Of course you want to be careful, because you don’t want to take too much of a loss on that contract.

You can’t do this with any old stock, in my opinion. You want to be selling naked puts against stocks that you feel are undervalued or that you feel should have a core position in your portfolio. The stocks I’m suggesting today are not presently positions that The Liberty Portfolio has sold naked puts against, but depending on certain circumstances, they may be one day.

So here’s how you generate $1,000 in additional monthly income using naked puts.

Naked Puts for Monthly Cash: Expedia (EXPE)

Expedia Inc (NASDAQ:EXPE) is a good candidate for selling naked puts against. It has high volatility so as to offer large premiums, but trades at a decent valuation. EXPE stock has been enjoying big increases in revenue and operating income over the past few years. It has routine and consistent free cash flow, and pays a small dividend.

It also has $3.3 billion of cash on hand. It’s a solid business as consumer travel continues to grow.

EXPE stock closed Wednesday at $109.24. EXPE reports earnings on April 26, so you want your naked puts contract to expire before then. The 20 Apr $109 naked puts are selling for $3.40 each. If you sell two of these, you will make $680. That is a very very generous premium of 3% for a mere 28-day holding period. Generally speaking, for most stocks, if you can squeeze out 2% or even 2.5% over a 30-day period, you are doing well.

Naked Puts for Monthly Cash: Exxon (XOM)

Exxon Mobil Corporation (NYSE:XOM) is not only a legacy energy play in exploration and production, but the market has cooled on the company lately for a variety of reasons. Certainly, it was a disappointment that the joint venture with Russian state-owned oil company Rosneft has been called off. Nonetheless, Exxon Mobil remains a powerhouse energy play, in a sector where you must have at least some exposure. I think Exxon has more upside than some of the other large legacy E&P plays.

XOM stock closed Wednesday at $75.04. It also does not report earnings until the last week of April, therefore you should look at selling the 20 APR $75 naked puts. If you do that, you should make a contract for about $1.35. So if you sell two of these you will earn $270, bringing the total to $950.

The premium here is 1.8%, which is about what you would expect from a blue-chip stock like this.

Naked Puts for Monthly Cash: Cisco (CSCO)

Cisco Systems, Inc. (NASDAQ:CSCO) has been a rather quiet stock for quite some time. Once the go–go days of the “four Horsemen” of the.com bubble passed, Cisco settled down into slow growth mode.

Cisco is not my favorite stock in the market, nor my favorite tech stock. However, it has settled into Peter Lynch stalwart status, growing earnings at a reliable 9% clip each year. Most of all, it generates an insane amount of free cash flow, and has very few capital expenditures. You’re looking at a company that generates between $11 billion and $13 billion every year in free cash flow.

CSCO stock closed Wednesday at $44.31. You can just sell one contract of 20 Apr $44 naked puts at 88 cents, and you’ll make $88. That will take your grand total to $1,038.

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 shares of XOM. 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].

 

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