Seeking Alpha
Profile| Send Message|
( followers)  

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 put in a "limit order."

An investor usually sells a put option if his/her outlook on the underlying security is bullish. The buyer of the put option pays the seller a premium for the right to sell the shares at an agreed-upon price. If the stock does not trade at or below the agreed-upon price (strike price), the seller gets to keep the premium.

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. Most put options expire worthless and 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.

The majority of traders opt to close the put out prior to expiration if they have the chance of buying it back at much lower price. For example, selling the put at $2.50 and buying it back at $0.50

Warning

This strategy should not be employed on speculative stocks. This strategy should only be employed by those who are bullish on the stock and would not mind owning it at a lower price.

The shipping industry is hated and despised, and it looks like there is almost no light at the end of the tunnel. However, there is a saying that the cure for high prices is higher prices and vice versa. The stock has taken a beating and is now attempting to put in a bottom. One could argue that perhaps all the bad news is already priced in. Even in this terrible environment, it has still managed to maintain a positive levered free cash flow, and it offers a hefty 15.4% yield. Individuals willing to take on a bit of risk could end up being well rewarded in the years to come. The players who lock in the largest gains are usually the ones that jump into a stock well before the public is even aware of a trend change.

Some reasons to be bullish on Teekay Tankers (TNK):

  • A hefty yield of 15.7%
  • A decent current ratio of 1.67
  • Short percentage of float is 8.8%, making it a decent candidate for a short squeeze
  • It has a good quick ratio of 1.67
  • Projected year over year growth rates for 2013 of 41%
  • A free cash flow yield of 16.4%

Suggested Put play for Teekay Tankers

There is a decent chance that it could trade back to the 3.70-3.90 ranges before trending higher. The Jan 2013, 5 puts are trading in the 1.35-1.65 ranges. The spread is a bit wide, but the open interest is high so if you work this option, you should be able to get a good fill. If the stock pulls back to the above stated ranges, the Jan 2013, 5 put should trade in the 1.55-1.85 ranges. For this example, we will assume that we can sell the put for 1.60. For each contract sold, $160 will be deposited into your account. If the stock closes below the strike price, the shares could be assigned to your account. If the stock does not trade below the strike price you get to walk away with the premium, which in this instance works out to a gain of 32%.

If you are bullish on the stock at the current price, then you can sell the puts immediately, but try to sell the puts at $1.45 or better. If you would like to leverage your position for free, then you could sell the puts and use the proceeds to purchase calls for free. If the stock takes off you could be handsomely rewarded.

Company: Teekay Tankers

Levered free cash flow = $ 37.03 million

Brief Overview

  1. Profit Margin = -10.9%
  2. Operating Margin = 6.3%
  3. Quarterly Revenue Growth = -0.10
  4. Quarterly Earnings Growth = - 47%
  5. Operating Cash Flow = 44.7 million
  6. Percentage Held by Institutions = N/A
  7. Beta = 1.88
  8. Short Percentage of Float = 8.8%
  9. Book value= $6.96

Growth

  1. Net Income ($mil) 12/2011 = -9
  2. Net Income ($mil) 12/2010 = 16
  3. Net Income ($mil) 12/2009 = 42
  4. Cash Flow ($/share) 12/2011 = 1.08
  5. Cash Flow ($/share) 12/2010 = 1.74
  6. Cash Flow ($/share) 12/2009 = 3.74
  7. Sales ($mil) 12/2011 = 121
  8. Sales ($mil) 12/2010 = 139
  9. Sales ($mil) 12/2009 = 113
  10. Annual EPS before NRI 12/2007 = 2.76
  11. Annual EPS before NRI 12/2008 = 2.6
  12. Annual EPS before NRI 12/2009 = 0.97
  13. Annual EPS before NRI 12/2010 = 0.53
  14. Annual EPS before NRI 12/2011 = 0.17

Dividend history

  1. Dividend Yield = 15.4%
  2. Dividend Yield 5-Year Average = 14.53
  3. Annual Dividend = 0.83
  4. Dividend 5-year Growth = -27.81

Dividend sustainability

  1. Payout Ratio = 3.53
  2. Payout Ratio 5 Year Average = 1.93

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 3
  2. ROE 5 Year Average = 16.99
  3. Current Ratio = 1.67
  4. Current Ratio 5-Year Average = 2.32
  5. Quick Ratio = 1.67
  6. Cash Ratio = 1.59
  7. Interest Coverage Quarterly = 0.63

Interesting companies

For investors looking for other ideas detailed data has been provided on one additional company. Our latest article could also prove to be a source of some new ideas Corning Inc: A Play With Potential That Is Trading below book .

Company: Lockheed Martin (LMT)

Levered Free Cash Flow = 2.01B

Brief Overview

1. Percentage Held by Insiders = 1.13

2. Relative Strength 52 weeks = 73

3. Cash Flow 5-year Average = 9.89

4. Profit Margin = 5.9%

5. Operating Margin = 8.33%

6. Quarterly Revenue Growth = 6.3%

7. Quarterly Earnings Growth = 26%

8. Operating Cash Flow = 2.99B

9. Beta = 0.64

10. Percentage Held by Institutions = 90.2%

11. Short Percentage of Float = 5.2%

Growth

1. Net Income ($mil) 12/2011 = 2655

2. Net Income ($mil) 12/2010 = 2878

3. Net Income ($mil) 12/2009 = 2973

4. Net Income Reported Quarterly ($mil) = 668

5. EBITDA ($mil) 12/2011 = 4993

6. EBITDA ($mil) 12/2010 = 5175

7. EBITDA ($mil) 12/2009 = 5504

8. Cash Flow ($/share) 12/2011 = 11.76

9. Cash Flow ($/share) 12/2010 = 10.34

10. Cash Flow ($/share) 12/2009 = 10.68

11. Sales ($mil) 12/2011 = 46499

12. Sales ($mil) 12/2010 = 45803

13. Sales ($mil) 12/2009 = 45189

14. Annual EPS before NRI 12/2007 = 6.84

15. Annual EPS before NRI 12/2008 = 7.72

16. Annual EPS before NRI 12/2009 = 7.78

17. Annual EPS before NRI 12/2010 = 7.26

18. Annual EPS before NRI 12/2011 = 8.23

Dividend history

1. Dividend Yield = 4.8

2. Dividend Yield 5-Year Average 03/2012 = 2.94

3. Dividend 5-year Growth 03/2012 = 22.41

Dividend sustainability

1. Payout Ratio 03/2012 = 0.46

2. Payout Ratio 5-Year Average 03/2012 = 0.32

Performance

1. Next 3-5 Year Estimate EPS Growth rate = 5.04

2. 5-Year History EPS Growth 03/2012 = 3.83

3. ROE 5-Year Average 03/2012 = 66.49

4. ROE 5-Year Average 12/2012 = 61.55

5. Return on Investment 03/2012 = 34.82

6. Debt/Total Cap 5-Year Average 03/2012 = 52.62

7. Current Ratio 03/2012 = 1.19

8. Current Ratio 12/2011 = 1.16

9. Current Ratio 5-Year Average = 1.12

10. Quick Ratio = 0.96

11. Cash Ratio = 0.46

12. Interest Coverage Quarterly = 10.88

Conclusion

If you are willing to take on a bit of risk selling puts on Teekay Tankers could prove to be profitable from two fronts. If the shares are assigned to your account, you get the chance to get in at an extremely low price of $3.40. If the stock does not trade below the strike price you get to walk away with a hefty gain of 32% (premium received from selling the puts). Investors looking for other ideas might find this article to be of interest Caterpillar: A Yield Boost Of 12% Or A Lower Entry cost

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. Options table sourced from yahoofiance.com


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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: Teekay Tankers: A Potential Yield Boost Of 32% On This Contrarian Play