Sell These 3 Out-of-the-Money Puts for Plenty of Income

Another week of trading will shortly be in the books. As usual, some high-profile news stories revolve around some of America’s most popular stocks. 

Tesla (TSLA) reported Q4 2023 results that left a lot to be desired. Archer-Daniels-Midland (ADM) lost 25% this week after it put CFO Vikram Luthar on administrative leave while outside counsel investigated accounting practices within its Nutrition reporting segment. Lastly, Humana (HUM) lost more than 11% on a weak forecast for 2024.      

There’s always something going wrong in the markets. I guess that’s what makes it so exciting. Now, onto my Friday commentary about unusual options activity and the stocks that have caught my attention recently.

As usual, Wednesday's option trading had lots of Tesla and Nvidia interest. However, searching beyond the Magnificent 7, I found three good names with unusual options activity from yesterday that should generate attractive for investors.

Have an excellent weekend!

New Fortress Energy

New Fortress Energy’s (NFE) June 21 $30 put had a Vol/OI ratio of 48.16 on Wednesday. That’s pretty darn high.

The company develops, finances, and operates natural gas facilities, power plants, and logistics solutions in the U.S., Europe, Latin America, and the Caribbean. 

In December, the company announced it had acquired a 1.6 GW (gigawatt), 15-year PPA (power purchase agreement) in Brazil from CEIBA Energy, a portfolio company of Denham Capital, a private firm focused on the global energy transition. 

The PPA enables it to fully utilize its existing Brazil infrastructure assets to supply power in the country. The deal adds $280 million in annual fixed capacity payments to New Fortress.

“With today’s acquisition of the PortoCem PPA, we add a contracted, long-duration asset that is highly complementary to our Brazilian footprint. This aligns with our strategy to vertically integrate and optimize our assets in an effort to drive shareholder value over the long-term,” said Andrew Dete, Managing Director of New Fortress Energy.

In Q3 2023, New Fortress generated $562 million in revenue and $119 million in adjusted net income. Revenues were 9.1% higher than Q3 2023, while adjusted net income was 98.4% higher than a year earlier. 

It’s got a great little clean energy business.  

As for the put, if you sell one or more contracts, the bid price of $1.85 was an annualized yield of 13.9% based on Wednesday’s closing price of $33.10. With 147 days to expiration, there is some risk that you’ll have to buy the shares at expiry. However, it’s rarely traded below $28 over the past year. The net price you would pay for the shares would be $28.15.

Having traded near $60 on two occasions over the past five years, the risk/reward proposition here is fair.   

Tenet Healthcare

Next up, we’ve got Tenet Healthcare (THC). 

It operates or has an economic interest in more than 480 ambulatory surgery centers and surgical hospitals, 61 acute care and specialty hospitals, 110 other outpatient facilities, a network of leading employed physicians, and a global business center in Manila, Philippines. In addition, its Conifer Health Solutions subsidiary helps other healthcare operators provide value-based care to its patients.

In late October, it raised its 2023 outlook. It now expects 20.4 billion in Revenue at the midpoint of its guidance, with an adjusted EBITDA of $3.42 billion and an adjusted EBITDA margin of 16.8%. It reports Q4 results on Feb. 8. 

Based on an enterprise value of $22.4 billion and a free cash flow of $1.38 billion, Tenet has a free cash flow yield of 6.2%. Anything over 8% is value territory. It’s fair value. 

The Feb. 16 $75 put had a bid price of $1.60. Based on a closing price of $82.66, its annualized yield was 33.0%. 

Worst case, you have to buy the shares at $73.40. Unless it reports something unexpected in February, I don’t think its share price will fall 10% over the next three weeks. 

Netflix

Netflix (NFLX) is the third of the puts to sell for income. 

I was not shocked that Netflix reported excellent fourth-quarter results this week. I’ve long felt that its password crackdown was a smart business decision. You might find the occasional thrifty person complaining about it. Ultimately, however, it is theft, regardless of the value. 

At the same time, it cracked down on password sharing. It introduced an ad-supported subscription, which provides the company with ad revenue and appeases those thrifty people I referenced above. 

As The Motley Fool points out, it added at least two million subscribers in Q4 in all four geographic regions, including five million in EMEA (Europe, Middle East, and Asia). Equally important, it raised its 2024 operating margin to 24%, up 300 basis points from 2023 and 600 from 2022. 

The world is Netflix’s oyster, which isn’t good news for its competitors. 

As for the put to sell, I’m looking at the April 19 $510 strike with a $12.75 bid. With 84 days to expiration, it has an annualized yield of 9.6%.  

The 38 analysts covering NFLX stock, according to Barchart.com, rate it a Moderate Buy (4.03 out of 5) with a mean target price of $489.34, well below where it’s currently trading. 

The target price will change after it reports another strong quarter in April. Like THC, the downside is minimal.

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