Options for Week #50

In these posts we will be looking at four assets that we could sell call or put options on to create some extra income. These suggestions are just some ideas to consider. Do your own research and make your own decisions!

In the previous post we looked at Caterpillar, Netflix, Walgreens Boots Alliance and AT&T. CLICK HERE to read about last weeks options.

The way I select the candidates is based on multiple factors:

-Price/earnings valuation;
-Trading range and/or 52 week high/low;
-Market sentiment;
-A contrarian view.

Short calls

Whenever you sell a call option it counts as a short position, you take on the obligation to deliver shares at a certain price and preferably the stock won’t go higher than the strike so that you can keep the premium without having to deliver any shares.

Company #1: Applied Materials

After some decent earnings number the stock surged to an all time high, shortly after that we experienced a big drop in price, from $64 to $55. Now we’re back at the $60s due to trade war talk. Once markets realise they cannot rally further on Trade Phase 1 Deals the stock might drop back to the recent levels of around $55.

Current price: $59,87
P/E: 21.11 (Forward 13.68)
52 week range: $28,79 – $63,07

Company #2: Netflix

Netflix keeps getting new competitors by the week, it also continues burning cash as if there is no tomorrow. Not to say that long term their business might not work out, however in the short term, with a possible recession on the horizon, there might be significant negative price action in a stock that is priced expensively and that burns cash like Netflix.

Since last week the price already declined from $307,75 towards $298,50, yet I believe there is more to be had.

Current price: $298,50
P/E: 94.79 (Forward 54.24)
52 week range: $231,23 – $385,99

Short puts

Whenever you sell a put option it counts as a long position, you take on the obligation to buy shares at a certain price and preferably the stock won’t go lower than the strike. This way you are able to keep the option premium without having to buy any shares.

Company #1: IBM

International Business Machines has lagged the entire technology market for some years now. Many believe it will only turn around when the CEO will finally leave the company. I think this is correct, however with the recent acquisition of Red Hat Software there might be some serious growth to be had again for IBM. Revenues are started to fire up and IBM is said to be a frontrunner in technology like Artificial Intelligence and Blockchain. This might be an enormously long play and thus I suggest selling options as far away as possible.

Current price: $134,21
P/E: 12.26 (Forward 10.09)
52 week range: $105,94 – $152,95

Company #2: Kraft Heinz

Heinz, as we all know, has seen a horrible few years. The products are said to be outdated for young people and management has only focused on cutting costs. As we hovered around these low levels for a few quarters now, I believe the bottom might be in. Insiders have been buying KHC stock recently which also might indicate there is gains to be had. Also I believe there are two positives for KHC in the relatively short term. It’s a defensive company which always thrives in recessions. People buy cheaper (pre-made) stuff again, and investors buy defensive stocks. Also the valuation has been destroyed the past few years, which might make investors invest in the stock as the multiples aren’t as high and thus there is a bigger margin of safety. However, this brings some risks with it, KHC is an unloved stock right now and so I’d suggest playing the extreme long term here.

Current price: $31,60
P/E: – Negative – (Forward 12.22)
52 week range: $24,86 – $48,66

What I usually do

I usually play these kind of situations with a margin of safety of at least 10% and a medium to long term option.

Note that I’m merely pointing out some interesting names to look at. You should ALWAYS do your own research!

To find more information about options CLICK HERE.

To see my own option trades CLICK HERE.

To see the option trades I do for other people CLICK HERE.

For any questions regarding options, leave them down below in the comment section or simply hit me up on any of my social media channels!

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