In yesterday's entry, I spoke about InvestorPlace's Lawrence Meyers' discussion of three stocks on which to sell naked puts to generate $1,100 in monthly income. My assessment of his recommendations was that they were a bit on the riskier side, and did not address the question of margin requirement. I offered a safer version in Altria (MO), just as an example. I did not elaborate, nor give my own version of how to generate a similar income stream. I shall attempt to do so now.
Admittedly, MO is not a high-flying stock, and perhaps for that reason does not command high option prices. But it is relatively safe, in that it is a steady stock, not prone to wide fluctuations in price. Selling OTM puts likely will not trigger assignment.
Clearly, that's not the only possibility. I like Mr. Meyers' suggestion of Starbucks (SBUX). As discussed yesterday, its current market price is $74.43, and the Jul14 72.50 strike put goes for 3.10 on the bid. Let's stay with Mr. Meyers' recommendation to sell 2 naked puts. MR: $5,444.00. Income generated: $620.00. ROI: 11.38%.
My next choice is Yahoo! (YHOO), at $37.23. It may seem somewhat volatile to some, but here is my rationale. Since its new CEO, Marissa Mayer, took the helm, the stock has rallied substantially, perhaps because of the expectation of good things to come. In fact, YHOO rallied above $41, and has recently settled back down to the $37 mark. In light of the selloff of March 13, 2014, the stock is even further down in price. This is usually a great place to sell naked puts with the expectation of a bounce. The Jul14 OTM 36 strike puts are going for 2.51 on the bid. Let's sell 2 naked puts. MR:$2,762.00. Income generated: $502. ROI: 18.17%.
Next on my list would be Boeing (BA). With its recent pullback from a high of around $141; its multiyear contracts around the world, Boeing is a stellar company (pardon the pun!) which should continue its high-flying (a'hem) performance. Currently at $121.71, the Aug14 120 strike price put goes for 7.25 on the bid. Again, we will sell 2 puts. MR: $9,627.00. Income generated: $1,450. ROI: 15.06%.
Note that all of these stock put options (I kept them down to 3 for the sake of examples) expire either July or August 2014, for an extra margin of safety in terms of time, to allow them to recover from recent selloffs, and simply grow as part of their normal cycle.
The total cash produced by selling 2 naked puts each of SBUX, YHOO, and BA comes to $25.72 or $2,572.00 total, with a total margin requirement (MR) of $9,167.90 (calculated as $46,674 x 35%-$9,740+$2,572). ROI: 28%.
Instead of generating $1,000 per month, you would be generating $2,572 for about 5 months. Not as good a return, but probably a safer return when compared to the test case of Mr. Meyers' recommendations for an income of $1,100 on margin requirement of $13,712, for an ROI of 8.02%.
Please note again that the numbers above are based on a hypothetical 35% margin requirement for the underlying stock. Your brokerage and stock selection may require more or less margin.
CAVEAT: None of this constitutes stock recommendations. These are merely examples.
CAVEAT: Another caveat is that I am arbitrarily taking 35% of the underlying stock price in calculating margin requirements. Note that not all stocks qualify for 35% - some have a 50% requirement, others only a 25% requirement - and some of this depends on the individual brokerage house. These examples are educational only.
No comments:
Post a Comment