Friday, at last. Friday, at last! It doesn’t quite have the same ring as Martin Luther King’s iconic words. Perhaps that’s why I’m writing about investments rather than social justice issues.
For my final commentary of the week, I’m looking for three put options to sell for income with an equity kicker. By this, I mean that the income they’ll provide is nice, but the reason for making these potential trades is for long-term capital appreciation.
For example, in Thursday trading, Tupperware (TUP) had an unusually active put option that yielded 129% (annualized) based on its $1.85 bid price -- Jan. 19/2024 $3 strike -- but I certainly couldn’t, in good conscience, recommend TUP stock. It’s a dog with fleas.
Looking out beyond 100 days to expiration, here are three put options I think you’ll find intriguing.
Have a great weekend!
AI Fits Nvidia Like a Glove
I've been a fan of Nvidia's (NVDA) for a long time. A big reason is CEO and co-founder Jensen Huang. He always seems ahead of the curve regarding the next significant secular trend in technology. Artificial intelligence (AI) is the company's latest growth driver.
NVDA stock trades at nearly 42x sales and 50x the 2025 earnings per share estimate of $9.29. With Nvidia stock up 227% in 2023, I’m not about to pretend its stock is cheap.
While you have to pay for quality, the Jan. 17/2025 $360 put gives you the opportunity for some income while reserving a possible lower entry point in the future.
If you sold the put on Thursday at a $42.15 bid price with a $459 share price, you obtained an annualized yield of 6.2% over the next 540 days (~1.5 years). That’s not a huge income relative to what you could get selling other puts, but it’s enough to bide your time to get a better share price for NVDA stock.
In mid-July, BofA Global Research analyst Vivek Arya raised his price target for Nvidia by $50 to $550, 18% above where it currently trades. The analyst rates it a Buy.
“‘Cloud/enterprise spending on AI [is] driving demand for [Nvidia chip] accelerators,’ he wrote. ‘Within accelerators, NVDA can hold its dominance,’ he wrote, adding the company has about 75% of the market for advanced AI semiconductors,” Barron’s reported the analyst’s July 18 comments.
If you want to park some money, selling this NVDA put might be a low-risk way to generate above-average income.
Fly Me to the Moon
Second on my list is the Jan. 17/2025 $42 put for Delta Air Lines (DAL). Based on Thursday’s closing price of $45.75, its annualized yield is 6.8% ($4.60 bid), 60 basis points higher than the NVDA put.
Delta's had a good run in 2023. Its stock is up nearly 41% year-to-date. However, thanks to the pandemic, it’s down 16% over the past five years. In the airline heyday of 2019 and early 2020, DAL traded close to $60, the highest level in its history as a public company. It also briefly traded below $20 in May 2020.
Barring a deep recession (unlikely at this point), it’s got an excellent shot to test $60 in the next 12-18 months.
Deutsche Bank (DB) analysts have a Buy rating on DAL stock. In late June, it commented on some of the good news coming out of Delta’s annual Investor Day. One tidbit I hadn’t thought about: Delta is the fifth-largest e-commerce retailer in the U.S. behind some big hitters, including Amazon (AMZN) and Apple (AAPL).
“Airline demand continues to be very strong as the company heads into the peak summer travel period, as evidenced by Delta raising its June-quarter top-line guidance, from 15%-17% (year over year) to 17%-18%. Trans-Atlantic demand has been exceptionally strong,” Barron’s reported the analysts’ comments.
I’ll never forget that Delta CEO Ed Bastian put passenger safety above revenue during the pandemic by keeping the middle seat open long after its peers had opened the floodgates. You can snicker all you want about the validity of those health concerns, but people were freaking out about Covid at the time.
Of all the U.S. airlines, Delta is my favorite.
It’s More Than Humira
When anyone talks about Abbvie (ABBV) these days, there is the prerequisite mentioning of Humira, the company’s top-selling auto-immune disease drug, which has lost its U.S. exclusivity, resulting in lower year-over-year sales.
However, it reported better-than-expected quarterly results at the end of June, which has lit a fire under its stock. ABBV is up 14% since.
Analysts aren’t big on its stock. According to Barchart.com data, of the 17 who cover it, eight give it a Moderate or Strong Buy, with the rest a Hold, and a $170.21 target price, 12% higher than its current share price.
In addition to Humira, Abbvie has nine other drugs with annual revenue of over $1 billion, plus a pipeline of medicines in development.
CEO Rick Gonzalez said the following about its pipeline in its Q2 2023 conference call:
“As I look at forward-looking performance through the end of this decade and into the early part of the '30s, we're highly confident we can deliver high single-digit growth with the pipeline that we have now, and ultimately, with the assets that we have in the marketplace and how they're performing in the marketplace and their ability to be able to drive significant growth,” Gonzalez stated.
The company’s making decisions based on 2040, not the next quarter. Patient investors should be rewarded.
As for the ABBV put in question, I’m talking about the Nov. 11 $140 put and its $2.75 bid. Based on a closing price of $148.85, it’s got an annualized yield of 5.8%. Currently 8% above the strike, the $137.25 net price you’d pay if the shares are put to you is very close to its low for the past 52 weeks, so that it would make an excellent entry point.
Of course, it could keep increasing, and you’d have to settle for the $275 premium income.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
