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Selling naked puts is a great way to purchase shares in companies you like at a predetermined price. In essence, you are getting paid to wait.

Benefits associated with selling naked puts

  1. In essence, you get paid for entering a "limit order" for a stock or stocks you would not mind owning.
  2. It allows one to generate income in a neutral or rising market.
  3. When you sell a naked put you are in a way acting like an insurance agent. The seller of the option agrees to buy the stock in the future if it drops to a certain level before the option expires. For this, you (the seller) are paid a premium upfront. If this strategy is repeated over and over again these premiums can really help boost you returns over time.
  4. Acquiring stocks via short puts is a widely used strategy by many retail traders and is considered to be one of the most conservative option strategies. This strategy is very similar to the covered call strategy.
  5. The safest option is to make sure the put is "cash secured." This simply means that you have enough cash in the account to purchase that specific stock if it trades below the strike price. Your final price would be a tad bit lower when you add the premium you were paid up front into the equation. For example, if you sold a put at a strike of 20 with two months of time left on it for $2.50; $250 per contract would be deposited in your account.
  6. Time is on your side. Every day you profit via time decay as long as the stock price does not drop significantly. In the event it does drop below the strike you sold the put at; you get to buy a stock you like at the price you wanted. Time decay is the greatest in the front month.

Reasons to be bullish on Starbucks (NASDAQ:SBUX):

  • A strong levered free cash flow of $770 million
  • Zack's projects EPS to increase to $1.85 in 2012 and to $2.34 in 2013
  • Net income soared from $391 million in 2009 to $1.24 billion in 2011
  • Cash flow per share increased from $1.57 in 2009 to $2.30 in 2011
  • A quarterly earnings growth rate of 18.5%
  • A good five year ROE Average of 25%
  • Sales increased from $9.7 billion in 2009 to $11.7 billion in 2011
  • A very low long-term debt to equity ratio of 0.11
  • A very strong interest coverage ratio of 52.9
  • A great current ratio of 2.21
  • A projected 3-5 year EPS growth rate of 17.7%
  • A low payout ratio of 42%
  • A good quarterly revenue growth of 14.7%
  • Total return for the last three years is a strong 331%
  • Year over year projected growth rates of 27.7% and 25.11% for 2012 and 2013 respectively
  • $100K invested for 10 years would have grown to $534K

It reported stellar second quarter results. Some of the highlights from the second quarter are:

  • Global comparable sales growth increased by 7%
  • Growth in comparable stores in China improved for the 7th consecutive quarter as sales growth exceeded the 20% mark
  • EPS rose to a record of $0.40; an increase of 18%
  • Total net revenue came in at $3.2 billion and increase of 15%
  • It opened up an additional 175 new stores globally. It now has 3,000 stores in the China/Pacific segment. It also opened its first store in Norway.
  • Channel development revenues soared by 57%, primarily driven by sales of Starbucks and Tazo branded K-Cup packs.
  • Management is accelerating new store growth to approximately 1,000 new net stores for fiscal 2012 and raising their earnings targets for the year

Suggested put strategy for Starbucks

The stock is in a strong uptrend and for this strategy to work it would need to close below 50 on a weekly basis. If this is achieved there is a fairly good chance that it could test the 43-45 ranges which would roughly correlate to a 33% retracement from its highs. We would wait for a break below 50 and then look to sell the Jan 2012 42 puts. Then Jan 42 puts are currently trading in the $2.17-2.21 ranges and Starbucks is trading at $52.29 so it would be fair to assume that if Starbucks dropped to 50, these puts would probably be trading in the 3.00-3.10 ranges. For simplicity, let us assume that we can sell the puts for $3.00 if Starbuck's dips below 50. If the shares trade below 42 and if the shares are assigned to you your final price will be $39. This would be an excellent entry for a company whose prospects look bright going forward. If it does not trade below 42, then you get to keep the money, and you can generate a decent stream of income from repeating this process.

For those who do not want to wait and think it's a good time to get into Starbucks. You can still reduce your entry price by selling naked puts at strikes you would not mind owning the stock at. In these volatile times markets (and stocks) have a tendency to overshoot both to the upside and downside.

Other interesting companies

For investors looking for other investment ideas, detailed data have been provided on four additional companies. Additionally, investors can draw some ideas from our latest article: Merck Among 5 Interesting Plays To Consider.

Company: Blackrock Kelso (NASDAQ:BKCC)

Growth

  1. Net Income ($mil) 12/2011 = 77
  2. Net Income ($mil) 12/2010 = 72
  3. Net Income ($mil) 12/2009 = 67
  1. Cash Flow ($/share) 12/2011 = 0.88
  2. Cash Flow ($/share) 12/2010 = 0.8
  3. Cash Flow ($/share) 12/2009 = 1.26
  1. Sales ($mil) 12/2011 = 132
  2. Sales ($mil) 12/2010 = 106
  3. Sales ($mil) 12/2009 = 125
  1. Annual EPS before NRI 12/2009 = 1.36
  2. Annual EPS before NRI 12/2010 = 0.96
  3. Annual EPS before NRI 12/2011 = 1

Dividend history

  1. Dividend Yield = 11.40
  2. Dividend Yield 5 Year Average 12/2011 = 12.5
  3. Dividend Yield 5 Year Average 09/2011 = 12.5
  4. Annual Dividend 12/2011 = 1.1
  5. Annual Dividend 12/2010 = 1.28
  6. Forward Yield = 10.91
  7. Dividend 5 year Growth 12/2011 = -8.96

Performance

  1. EPS Growth Quarterly(1)/Q(-3) = 125
  2. ROE 5 Year Average 12/2011 = 12.55
  3. Current Ratio 06/2011 = 0.91
  4. Current Ratio 5 Year Average = 1.46
  5. Quick Ratio = 0.91
  6. Interest Coverage Quarterly = 2.51

Company: Coca Cola Co (NYSE:KO)

Growth

  1. Net Income ($mil) 12/2011 = 8572
  2. Net Income ($mil) 12/2010 = 11809
  3. Net Income ($mil) 12/2009 = 6824
  1. Cash Flow ($/share) 12/2011 = 4.79
  2. Cash Flow ($/share) 12/2010 = 4.13
  3. Cash Flow ($/share) 12/2009 = 3.61
  1. Sales ($mil) 12/2011 = 46542
  2. Sales ($mil) 12/2010 = 35119
  3. Sales ($mil) 12/2009 = 30990
  1. Annual EPS before NRI 12/2009 = 3.06
  2. Annual EPS before NRI 12/2010 = 3.49
  3. Annual EPS before NRI 12/2011 = 3.84

Dividend history

  1. Dividend Yield = 2.70
  2. Dividend Yield 5 Year Average 12/2011 = 2.91
  3. Dividend 5 year Growth 12/2011 = 8.16

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 7.86
  2. ROE 5 Year Average 12/2011 = 30.46
  3. Current Ratio 12/2011 = 1.13
  4. Quick Ratio = 0.92
  5. Cash Ratio = 0.72
  6. Interest Coverage Quarterly = 31.97

Company: Lin Energy LLC (NASDAQ:LINE)

Levered free cash flow = $127 million

Growth

  1. Net Income ($mil) 12/2011 = 438
  2. Net Income ($mil) 12/2010 = -114
  3. Net Income ($mil) 12/2009 = -298
  1. Cash Flow ($/share) 12/2011 = 3.8
  2. Cash Flow ($/share) 12/2010 = 3.08
  3. Cash Flow ($/share) 12/2009 = 3.31
  1. Sales ($mil) 12/2011 = 1162
  2. Sales ($mil) 12/2010 = 690
  3. Sales ($mil) 12/2009 = 273
  4. Annual EPS before NRI 12/2009 = 1.73
  5. Annual EPS before NRI 12/2010 = 1.54
  6. Annual EPS before NRI 12/2011 = 1.79

Dividend history

  1. Dividend Yield = 8.10
  2. Dividend Yield 5 Year Average 12/2011 = 9.75
  3. Dividend 5 year Growth 12/2011 = 3.99

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 4.9
  2. EPS Growth Quarterly(1)/Q(-3) = -134.21
  3. Current Ratio 06/2011 = 1.26
  4. Current Ratio 5 Year Average = 1.9
  5. Quick Ratio = 1.26
  6. Interest Coverage =2.70

Company: Kohlberg Capital (NASDAQ:KCAP)

Growth

  1. Net Income ($mil) 12/2011 = 8
  2. Net Income ($mil) 12/2010 = -14
  3. Net Income ($mil) 12/2009 = 34
  1. Cash Flow ($/share) 12/2011 = 0.71
  2. Cash Flow ($/share) 12/2010 = 0.53
  3. Cash Flow ($/share) 12/2009 = 0.8
  1. Sales ($mil) 12/2011 = 28
  2. Sales ($mil) 12/2010 = 29
  3. Sales ($mil) 12/2009 = 34
  1. Annual EPS before NRI 12/2007 = 1.45
  2. Annual EPS before NRI 12/2008 = 1.5
  3. Annual EPS before NRI 12/2009 = 0.83
  4. Annual EPS before NRI 12/2010 = 0.53
  5. Annual EPS before NRI 12/2011 = 0.7

Dividend history

  1. Dividend Yield = 12.40
  2. Dividend Yield 5 Year Average 12/2011 = 14.76
  3. Dividend 5 year Growth 12/2011 = -8.04

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 15
  2. Current Ratio 06/2011 = 0.78
  3. Current Ratio 5 Year Average = 3.67
  4. Quick Ratio = 0.78
  5. Interest Coverage Quarterly = N/A

Conclusion

The markets should remain in a corrective mode, for the most part, for the second quarter. Long-term investors can use strong pullbacks to slowly start deploying money into long-term investments. A great way to get into a stock at a price of your choosing is to sell puts at strikes you would not mind owning the stock at. Investors looking for other investment ideas might find this article to be of interest: Is It Worth Getting Into General Electric?

Disclaimer

This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies - let the buyer beware.

Source: An Excellent Put Strategy For Starbucks

Additional disclosure: EPS and Price vs. industry charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Option table sourced from yahoo finance.