7 Stocks That Provide Great Income Potential With Options

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Includes: AABA, DRYS, F, JASO, LDK, NOK, SVU
by: Rougemont
I regularly use options to create income in my portfolio, as well as a way to buy stock for less than the current value. If you are not familiar with or do not understand options, there are a number of good books on this subject and it makes sense for serious investors to get familiar with and possibly use options as another financial tool.
The stocks below have very high option premiums and it is possible to create significant profits on a monthly basis by either selling covered calls on an existing stock position or (my favorite) selling puts on these stocks. When you sell a put option, you give another investor the right to sell shares to you at a set price by a set date. The stocks below are all names I would not mind buying and owning anyhow, so when I sell a put option contract, I get paid the option premium, and buy these stocks if they are selling below the exercise price on the expiration date. If the stocks remain above the exercise price, I keep the option premium and I do not buy the shares.
As an example, a single May $5 put option for Dryships (NASDAQ:DRYS) trades for about 45 cents. Since each option contract represents 100 shares, each contract would represent about $45. (DRYS currently sells for $4.75.)
For each of these contracts I sell, I receive $45, but I will be forced to buy 100 shares of DRYS on the May expiration date if they are trading below $5.
Let's assume, DRYS is still $4.75 on the May expiration date and I buy the shares. Since I collected $45 for each contract (100 shares), my net cost on the 100 shares is really as follows: $5 times 100 = $500, minus the $45 in option premium, means my cost is $455 for 100 shares of DRYS and the shares are selling for $4.75 or $475 for 100 shares. When you only sell 1 contract, it's not too interesting, but if you do more, it can get very lucrative.
When you consider that you can get paid nearly 10% of the stock value in about 1 month, it's easy to see the potential for gains. There are interesting ways to play this after an initial trade if the option is exercised and you buy the shares. Of course, if this stock trades at $5 or more, I get to keep the option premium and do not buy the shares, in which case, I can just do the same trade next month, for perhaps the June contract. If I do end up buying the shares, and they still trade at $4.75, I could sell for a small profit since my cost is only $4.55 per share after factoring in the options premium.
Another strategy is to keep the shares and sell covered calls on this position, which currently would bring in about $25 per contract. This would further reduce the cost basis from $4.55 down to $4.30. You can see how there are numerous ways to play this and manage each situation with a strong chance of making solid gains. This is just a simple example, and you have to fully understand the risks in options before considering them. While I tried to explain the strategy, the list of stocks below are best used as possible ideas for investors who are already experienced in options trading. It's very important to not expose yourself with too much risk with options, especially with any single stock.
Most of these companies are trading close to their 200 day moving average which means they are more likely to be trading near these same levels when options expire. Here are the companies I find large option premiums in:
Dry Ships (DRYS) shares are trading at $4.75. Dry Ships operates drybulk ships and drilling rigs. The stock has dropped from 52 weeks highs of $6.82 per share. The 50 day moving average is $4.89 and the 200 day moving average is $4.78. The earnings estimates for DRYS are $1.11 for 2011. These shares are cheap and trade at less than 5 times earnings. They also trade below book value which is stated at $10.92.
Which DRYS options to consider: When you see the 50 and 200 day moving average is nearly $5 on these shares, that's a fairly good sign these shares will be around $5 when the options expire, so I always go with the $5 puts and calls in this stock. Selling the May $5 put nets about $45 per contract.
JA Solar Company, Ltd. (NASDAQ:JASO) are trading at about $6.55. These shares have fallen, from a 52 week high of $10.24. The 50 day moving average is $7.11 and the 200 day moving average is $7.19. JASO has earnings estimates of about $1.40 per share for 2011. Book value is listed at $6.22 per share. These shares are trading for close to book value and about 5 times earnings.
Which JA Solar options to consider: Since the moving averages are at about $7, I would go with that for now. Selling the May $7 put nets about $70 per contract. If the option is exercised, the net cost basis would be about $6.30 per share.
Yahoo, Inc. (YHOO) is trading around $16.54. Yahoo operates a number of well known Internet sites and is based in California. The 50 day moving average is $16.75 and the 200 day moving average is $15.65. YHOO is estimated to earn about 76 cents per share in 2011 and 92 cents in 2012. Yahoo owns stakes in Alibaba in China and Yahoo! Japan which it may be able to cash in on in the future. Yahoo! Japan has an estimated value of about $8 billion, so there is a lot of value to unlock in these shares.
Which Yahoo options to consider: Again, I would use the moving averages to let me know what the stock is likely to trade for at the next expiration date. In this case, $16 is the option I like to work with. Selling the May $16 put nets about $60 per contract. If the option is exercised, the net cost basis would be about $15.50 per share.
LDK Solar (NYSE:LDK) is trading at about $11.63. The 50 day moving average is $12.41 and the 200 day moving average is $10.27. LDK has very strong earnings potential and based on guidance from the company, it appears they could earn over $3 per share in 2011. This puts the PE ratio at about 4 which is extremely low for one of the leading solar companies. Book value is listed at $7.80 per share.
Which LDK options to consider: Since the moving averages are between $12.21 and just over $10, I would go with $11 puts for now. Selling the May $11 put, nets about $60 per contract. If the option is exercised, the net cost basis would be about $10.40 per share.
Nokia Corp (NYSE:NOK) shares are trading at $8.74. Nokia is a leading mobile phone company. The 50 day moving average is about $9.00 and the 200 day moving average is about $9.68. Earnings estimates for NOK are just over 70 cents per share in 2011, and 80 cents for 2012, so the PE ratio is about 12 on these shares. Nokia pays a dividend of about 46 cents per share which is equivalent to a yield of 5.4%.
Which NOK options to consider: Since the moving averages are around $9, I would go with $9 puts for now. Selling the May $9 put nets about $92 per contract. If the option is exercised, the net cost basis would be about $8.08 per share. An added bonus is that if you end up owning these shares, you can collect a solid dividend.
Supervalu (NYSE:SVU) shares are trading at $9.08. Supervalu is a leading grocery store company and is based in Minnesota. The 50 day moving average is about $8.36 and the 200 day moving average is about $9.08. Earnings estimates for SVU are $1.29 per share in 2011 and $1.19 for 2012 so the PE ratio is about 7 on these shares. Supervalu pays a dividend of about 35 cents per share which is equivalent to a yield of 4.6%.
Which SVU options to consider: Since the moving averages are close to $9, I would go with $9 puts. Selling the May $9 put nets about $60 per contract. If the option is exercised, the net cost basis would be about $8.40 per share. An added bonus is that if you end up owning these shares, you can collect a solid dividend.
Ford Motor Co. (NYSE:F) shares are trading at $14.98. The 50 day moving average is about $15.09 and the 200 day moving average is about $14.49, so these shares are trading near strong support levels. Ford shares hit a 52 week high of $18.97 earlier this year. Earnings estimates for F are $1.91 per share in 2011 and even more for 2012 which puts the PE ratio at about 7.
Which F options to consider: Since the moving averages are close to $15, I would go with $15 puts. Selling the May $15 put nets about $68 per contract. If the option is exercised, the net cost basis would be about $14.32 per share.
The data is sourced from Yahoo Finance and Stockcharts.com. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. This information is solely educational in nature and not intended to serve as the basis for any investment decision.

Disclosure: I am long YHOO, LDK, NOK, JASO.