Unusual Options Activity: Selling Puts on These 3 Free Cash Flow Beauties

As I write this about halfway through the final trading day of the week, the S&P 500 is down marginally. For the month, however, the index has lost approximately 8% of its value. For the year, it’s off more than 24%. 

Investors will be glad to see September go. It’s never a good month for the markets, but this year it’s been especially brutal. The worst since 2008. According to MarketWatch, since 1928, the S&P 500 has lost 7% or more on 11 occasions. 

Looking forward to October, the index typically goes up 54.6% of the time following a September loss of 7% or worse. 

With that in mind, I’m going to select three puts to sell that are quality companies with significant free cash flow generation that I believe will net you healthy premium income in a market that’s been generally unforgiving.

Apple 

It definitely wasn’t a good month for Apple's (AAPL) stock. It’s off nearly 11% in September. 

A big reason for the decline in its share price is investor concerns about waning interest in the iPhone 14. A Bloomberg report suggested that the company, which announced it would increase production of the phone in the second half of 2022 by six million units to 96 million, had reversed its decision.

Analysts seem to be relatively happy with the sales results of its latest versions of the iPhone, especially the higher-end models. The average estimate for iPhone sales in fiscal 2023 (September year-end) is 245 million. Several analysts have noted that the demand for the higher-end versions of the iPhone 14 remains high. 

According to Barchart analyst data, the 20 analysts that cover its stock rate it a Strong Buy with a mean target price of $184.53, 32% higher than where it’s currently trading.

In the nine months ended June 30, Apple’s free cash was $90.6 billion, up from $76.0 billion in the same period a year earlier. The company’s free cash flow yield is 5.3%, based on an annualized free cash flow of $120.8 billion divided by a market cap of $2.29 trillion. 

I consider anything between 4% and 8% to be growth at a reasonable price. 

As for the put option to sell, I’m looking at the April 21/2023 $100 contract. It’s got 203 days until expiry with the shares trading about 29% out of the money. While it’s unlikely that you will be able to buy Apple shares at $100, you will get $288 in premium income. 

Option purists would probably say you can’t make money selling put options so far out but Apple’s a good company. If I can buy the stock for $100, that’s a bonus. 

Alphabet 

This next put option to sell could be considered even riskier because of the 476 days until expiry on the Alphabet (GOOG) Jan. 19/2024 $92 contract. Out of the money by nearly 6%, you’re essentially trading the sweet $10.30 premium in return for a really long holding period. 

A lot can happen between now and 2024. 

That said, we are talking about one of the world’s largest companies. Its trailing 12-month free cash flow is $65.2 billion on $278.1 billion in revenue for a free cash flow margin of 23.4%. Apple’s is 770 basis points higher, mind you, but it’s still very high. 

Alphabet’s second-quarter results were workmanlike, if not spectacular. On the top line, it increased revenues by 16% year-over-year, excluding currency, to $69.7 billion. In comparison, its operating income was $92 million higher than last year at $19.5 billion, with a 300 basis-point reduction in its operating margin.

A couple of weeks after the end of the second quarter, Alphabet executed a 20-for-one stock split that brought its share price down to two digits from four.

The company’s cloud business continues to gain traction -- revenue was up 35.6% over Q2 2021. However, the increase came with an asterisk--it lost $858 million in the quarter, 45.1% higher than the same quarter a year ago.  

Analysts do like the stock. Out of the 30 that cover it, 26 rates it a Strong Buy, three rates it a Moderate Buy, and one rates it a Hold. The mean target price is $147.52, 53% higher than where it’s currently trading.

Alphabet’s advertising business remains as solid as ever. Sure, profitability could be a little higher, but it’s still one of the best tech stocks to buy for the long haul.

Futu Holdings

I’ll probably regret this last pick but Futu Holdings (FUTU) is having a very strong year. The digital online broker has delivered many highlights through the first six months of 2022. 

The number of paying clients is up nearly 39% to 1.39 million while the total client assets fell 19.1% to HK$433.6 billion ($55.2 billion). However, on a sequential basis, they grew 12.3%. Further, it added more than 60,000 paying clients in the second quarter. 

On the top line, its revenues were $222.6 million, 10.8% higher than a year earlier, while it earned $87.7 million on the bottom line, 25.1% higher than in Q2 2021. 

I know that investors have become much more cautious about investing in Chinese companies but Futu appears to be ticking all the right boxes.

As for the put option to sell, I’m looking at the Nov. 4 $32 contract. It has a $1.19 bid price and expires in 35 days. If the option expires worthless, the annualized rate of return is nearly 41%. 

Currently trading 14% out of the money, the 35 days to expiry is short enough to make the bet safer than it appears. 

Besides, Futu’s financial situation is solid. Four out of the five analysts that cover it rate it a Strong Buy, up from a Moderate Buy a month ago. 

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