Unusual Options Activity: I’m Selling These 3 Puts for Profits

Last week I said that I would cover put options for a change of pace. As a man of my word, that’s precisely what I’ll do for this week’s look at unusual options activity. 

The premise for today’s article -- other than looking for put options exhibiting unusual activity -- is that I’ve committed to generating $1,750 in monthly passive income. That’s $21,000 in annual income. 

Using Barchart’s unusual options activity from July 28, I’ll select three put options to sell that will generate approximately $21,000 in annual income. 

It’s important to note that were this a real exercise using actual dollars, I would either need the cash in my account to cover the purchase of the underlying shares or, in the case of a naked put, have sufficient to cover the purchase where the put is exercised. 

All three of the put options will expire within a year. 

Beyond Meat

There is no question the maker of plant-based burgers, sausages, crumble, breakfast sausages, and soon steak has gotten hit hard over the past year. Down 75% over the past year, Beyond Meat (BYND) currently trades around $31.43 as I write this on Friday morning.    

The big news on Thursday was that the Beyond Meat experiment at McDonald’s (MCD) in the U.S. had concluded as planned. Analyst chatter suggests that the McPlant did not sell well in the 600 locations where it was tested. 

McDonald’s is a lot of things. Innovative, it’s not. I never expected the test to go well, especially in places like the South, where people tend to be conservative in their eating habits. 

Kim Kardashian jumped on the Beyond Meat bandwagon in May, joining the company as its first Chief Taste Consultant. The Kardashians do very little in business without thinking about their brand image. 

I look forward to the launch of its vegan steak slices. I’m confident that the market leader in plant-based foods will continue to innovate in the years to come--McDonald’s be damned. 

The put option I’m looking at selling is the Aug. 26 $20 put option. Its bid price on July 28 was $0.87. Selling 100 contracts would generate $8,700 in premium income [100 x 100 x $0.87]. If these were cash-secured put options, I would need $200,000 [100 x 100 x $20]  in cash in my account. The annualized total return is 55.4% [$8,700 / $200,000 x (365/29)]. 

Costco

If there’s a stock I’d have no problem owning were the put option to be exercised, Costco (COST) would be at the top of my list. 

Its business model is second to none in retail. It lives on the membership fees and passes on any savings from suppliers (that’s tough these days) to its customers through lower prices. And, it tends to pay its front-line employees more than most. 

More importantly, when the markets aren’t firing on all cylinders, COST stock has been a relative beacon of safety over the past year. Costco shares are up 26.2% over the past year compared to -7.2% for the S&P 500. 

Jefferies analyst Corey Tarlowe recently said Costco was her top pick amongst the stocks she covers. The analyst suggested the retailer’s got several things going for it despite a challenging economic environment for its customers. 

In the next year, Costco plans to open 25-30 new warehouses. Of those, 50% will be outside the U.S. Its international stores carry higher margins due to lower costs and reduced competition. 

As I said earlier, Costco lives by its membership fees. While it’s pondered an annual fee hike, inflation might stop it from doing so in 2022. Either way, the company’s renewal rate is upward of 90%. In the first nine months of 2022, Costco’s membership fees were $2.90 billion, 9.6% higher than a year earlier.

For Costco, the put option I’m looking at selling is the Sep. 16 $500 put option. Its bid price on July 28 was $7.30. It’s currently trading at $538.46. Selling 10 contracts would generate $7,300 in premium income [10 x 100 x $7.30]. If these were cash-secured put options, I would need $500,000 [10 x 100 x $500] in cash in my account. The annualized total return is 10.7% [$7,300 / $500,000 x (365/50)]. 

It’s not the same return as Beyond Meat, but I think we can all agree that Costco is the better company and safer bet over the long haul. 

Alphabet 

My final choice to generate premium income is Alphabet’s (GOOGL) March 17/23 $105 put option. Its bid price on July 28 was $6.50. It’s currently trading at $114.80. Selling 10 contracts would generate $6,500 in premium income [10 x 100 x $6.50]. If these were cash-secured put options, I would need $105,000 [10 x 100 x $105] in cash in my account. The annualized total return is 9.7% [$6,500 / $105,000 x (365/232)]. 

Alphabet delivered Q2 2022 earnings on July 26. They weren’t nearly as bad as people feared, although they did miss on both the top and bottom line. 

Interestingly, its advertising revenue grew 12% year-over-year to $56.29 billion. That was $400 million higher than analyst expectations. Rosenblatt Securities analyst Barton Crockett maintained his buy rating on the stock while cutting his target to $154 from $205. That’s still 34% higher than where it’s currently trading.

“Alphabet is not Snap, and is not enduring anything close to the level of macro-disruption that Snap and Twitter reported in their 2Q22 earnings last week,” Barron’s reported Crockett’s comments in a note to clients. “That said, the prudent course now we believe is to hew more conservatively.”

As always, Alphabet remains a free cash flow machine. It generated $12.6 billion in free cash flow in the second quarter. For the trailing 12 months ended June 30, its free cash flow was $65.2 billion. That’s a 4.3% FCF yield. I consider anything between 4% and 8% to be a reasonable price to pay for a stock.

For one of the world’s top companies, it’s a bargain. I’ll take $105 every day of the week. 

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