With the market’s recent momentum to the downside, it seems like a trader has two choices right now: hold their nose and pick stocks they like but risk short-term volatility sell-offs, or sit out the market altogether.
But there’s another option: selling puts to gain exposure to stocks you’d be happy to own at a lower price, while generating income on the put sale.
Here are six put option trades to consider.
View All Sell MSFT PutsRecommended by: Ken Trester, Editor, Maximum Options
Sell to open the Microsoft Oct 23 Put at 34 cents and buy if assigned. Even with stiff competition from Apple’s (NASDAQ:AAPL) iPad, Microsoft (NASDAQ:MSFT) is still a powerhouse software supplier for the complex needs of large corporations. Microsoft has rebounded nicely off its recent short-term low of about $24, and I don’t see it dropping back there anytime soon. And if it does, it’s a great company to buy at $23.
Get Ken Trester’s 7 Secrets to Successful Put Selling here.
View All Sell SDS PutsRecommended by: Ken Trester, Editor, Maximum Options
Sell to open the SDS Oct 21 Put at 39 cents with a stop at $20.50. I don’t see the ProShares UltraShort S&P500 (NYSE:SDS) dropping to $21 before expiration, so this is a good opportunity to pick up some income. If it does drop to $20.50, I recommend you buy back the options for a small loss.
See also: 11 Tips for Writing Naked Options
View All Sell VZ Puts (cash-secured)Recommended by: John Kmiecik, Market Taker
Sell the Verizon Oct 34 Put at 86 cents. A cash-secured put holds aside the cash that would be needed if the put is assigned and you’re forced to buy the stock. Verizon (NYSE:VZ) has had a nice area of support in the $33-$34 range this year. Selling this put makes sense because of this area of support. Hopefully, the stock will stay above that area and if it does fall in price, the support will do its job, so to speak.
If the short put expires worthless, great — the premium is the option traders to keep and the same strategy can be done again. If the put is assigned because the stock has fallen below the strike price, the dividend-paying stock (5.7% yield) is now in the option trader’s portfolio and hopefully the stock will rise in the future and produce wonderful dividends.
View All Sell AAPL PutsRecommended by: Michael Shulman, Editor, Options Income Blueprint
Apple (NASDAQ:AAPL) is a steal at $400. The stock is selling well below that, and you can generate a chunk of cash selling puts, and there are weekly and monthly puts on AAPL, and of course, LEAPs. The more cash you want, for income or to average down your position, the further out you go. For example, look at a January 2012 $345 LEAP — you can get almost $20, bringing the net cost of buying AAPL to $325 if you get put the stock. If it expires worthless, take the cash and go crazy. And of course, sell a put again.
View All Sell BAC PutsRecommended by: Michael Shulman, Editor, Options Income Blueprint
Beaten down and bad mouthed, traders killing the stock are not investors, and one investor, Warren Buffett, sees value here. So do I — in the very long term. Bank of America (NYSE:BAC) trades around $7, and it seems you don’t get much for selling a put — but in fact, you do. The January 6 Put is an astonishing value, almost a buck. BAC is too big to fail, its problems are known, the stock has a very hard technical floor around $6 — what’s not to like? If you get put the stock, your net cost is around $5, a tremendous value. If not, your return on capital is almost 15% in six months.
Sell MO PutsRecommended by: Tyler Craig, Tyler’s Trading
As bond yields continue to drop, investors are eyeing high-yielding equities with increasing interest. Fortunately, there are several such names that have upcoming ex-dividend dates. Resting near the top of the list is tobacco giant Altria (NYSE: MO). Despite the recent market correction, shares of MO have weathered the selling quite well and still reside above their 200-day moving average. With a share price around $26, Altria’s quarterly 41-cent dividend is currently yielding 6.2% — not too shabby, given current yields on 10-year Treasuries are south of 2%.
Traders looking to take the cash-secured short-put route in acquiring shares of MO should consider selling the October 25 Strike Put for around 75 cents. It offers a nice 3% return over the next month alone.
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