Who Needs Dividends? Get More Monthly Income with Naked Puts

I recently wrote an article describing how you can generate regular monthly
income by selling covered calls on shares of stock that you already own. Today
Im going to describe a very similar options strategy, one that also allows you
generate monthly income, this time on stocks that you dont own. Selling naked
puts may sound like something youd find in the red-light district of New
Orleans. But rest assured, this is a time-tested options trading strategy that
can provide tidy chunks of income if you target your choices carefully. Put Some
Instant Cash in Your Account Today When you sell a put, you are selling the
right for another investor to put shares of a chosen stock to you at a given
price on a given date. In other words, you will be forced to buy that stock. So
if I sell a Citigroup (NYSE: C ) Dec 30 Put for $2.70, then I am giving another
investor the right to sell me his Citigroup stock which I am obligated to buy
at $30 per share on or before Decembers options expiration date. In exchange, I
receive $270 (less commissions). If Citigroup closes above $30 on that date,
then not only do I not have to buy the stock, but I get to keep that $270
premium. If it closes below $30, I will have those 100 shares of Citigroup stock
put to me at $30. Thus, I'd better have $3,000 in my account in order to
purchase those shares. (When you're selling puts, your broker won't let you
make the trade if you aren't financially able to take delivery of the shares,
should that be the outcome of your trade.) However, since I received that $270
premium, if Citigroup should close above $27.30, then I'd still come out
ahead. If I do not own any shares of Citigroup at the time I sell the puts, this
is called a naked put . It's different than a naked call, which can result in
unlimited losses if the trade goes awry. With a naked put, the most you have at
risk is what it would cost if you were "put" the shares, which you know at
the time you initiate the trade. Now that you know the "worst" that can
happen with this strategy, let's take a look at how to make – and keep –
money by selling puts. How to be a Successful Put Seller Heres how Ive generated
monthly income off of naked puts, and have almost never had any stock put to me.
First, I choose a stock that I wouldnt mind owning anyway. Maybe I already have
a position, and Im thinking of adding to it, but I also don't think the shares
are going to take off anytime soon. Perhaps were between quarterly earnings
reports, and I dont expect much news until the next report comes around. For
example, I like First Cash Financial Services (NASDAQ: FCFS ), which is trading
at $41. I wouldnt mind owning 200 shares, but $41 is a little pricey for me. So
I see that the Dec 40 Puts are trading at $2.39. Now that is a mighty fine
premium. I like to generate about 2.5% monthly on option trades, and this one is
worth almost 6% for just under two months. Then, I will sell two FCFS Dec 40
Puts for $2.39 (to represent 200 shares), and net about $471 after commissions.
If First Cash closes above $42.39 on December expiration, Ill be a little bummed
that I didnt maximize my return by simply buying the stock. If it closes between
$40 and $42.39, I come out ahead and still may buy the stock. If it closes under
$40 but above $37.61, then the stock has been put to me and I got it at what I
consider a bargain price. And if it closes even lower than that, Im still happy
to have the stock, and now I can cost-average down and buy more if I wish.
Profit from Juicy Put Option Premiums Another stock with juicy put premiums that
Ive been following for most of the year is J.C. Penney (NYSE: JCP ), which has
been extremely volatile, but which I consider a bargain below $32. In times of
extreme volatility, Ill sell puts several dollars apart to give me a lot of
income, and possibly pick up a few shares at any number of attractive prices.
The same rules apply here as they do to covered calls, as I wrote in my earlier
article. Pick a stock you know well and have tracked, have a return target and
sell in bulk, and pick stocks that arent too volatile especially near earnings.
Lawrence Meyers presently holds naked Dec 40 Put positions in First Cash.