Use Puts To Buy These Value Stocks: NVIDIA Corporation (NVDA), Cisco Systems, Inc. (CSCO), The Western Union Company (WU)

Page 1 of 2

Although options can be extremely risky, selling put options can be a fairly conservative way to generate income or to buy stocks at a pre-determined price. It’s advisable to only do this for stocks that you’d be happy owning at the strike price – otherwise you could end up with a cost basis far above the intrinsic value of the stock. Here are three stocks that I’ve written about recently which are undervalued and have attractive put options.

NVIDIA Corporation (NASDAQ:NVDA)NVIDIA Corporation (NASDAQ:NVDA) – I wrote recently that NVIDIA Corporation (NASDAQ:NVDA) is deeply undervalued, with a large amount of cash and a robust free cash flow, and valued the stock between $16 and $20 per share. If fact, even under a no growth scenario the stock would be worth about $13 per share, higher than the current share price. NVIDIA Corporation (NASDAQ:NVDA) has about $3.73 billion in cash on the books, roughly $6 per share, meaning that cash represents almost half of its total market capitalization. With just over $1 of annual FCF/share, that puts the P/FCF ratio after subtracting out cash at 6.1. This seems outrageous given NVIDIA Corporation (NASDAQ:NVDA)’s dominant market position in graphics processors.

Now, your goal determines what strike price at which you should sell a put option.

If you want to buy the stock, then you can sell an at-the-money put option. The $13 strike price is slightly above the current stock price, meaning that if the stock stays flat through expiration you would be put the shares at $13 per share. If the stock price rises above $13 then the option would expire as worthless. The April $13 put option comes with a premium of $56 per contract, which would make your effective purchase price $12.44 if the option is exercised. If the option expires worthless, the premium represents a 4.3% return in 38 days.

If you want to generate income then you can sell an out-of-the-money put option. This creates a buffer so that the stock price would need to fall before the option is exercised. The April $12 put option comes with a premium of $15 per contract. The stock would have to fall about by about 6% from the current market price as of this writing for the option to be in the money. If the stock remains flat, then the premium represents a 1.25% return in 38 days, or 12% annualized.

Another option is the June $11 put option. This offers a larger buffer of about 13% in exchange for a lower annualized return of 7.2% over 101 days based on a premium of $22 per contract.

Cisco Systems, Inc. (NASDAQ:CSCO) – Cisco Systems, Inc. (NASDAQ:CSCO) is in a similar situation as NVIDIA Corporation (NASDAQ:NVDA), with a lot of cash on the books and a strong cash flow. I put the realistic fair value of a share of Cisco Systems, Inc. (NASDAQ:CSCO) at a minimum of $25 per share, meaning the stock is currently undervalued by about 17%. Cisco Systems, Inc. (NASDAQ:CSCO) has a net cash position of $30 billion, or $5.60 per share, making up 26% of the total market capitalization. And with over $10 billion in FCF per year, the P/FCF ratio adjusted for cash is about 8.5. Cisco Systems, Inc. (NASDAQ:CSCO) absolutely dominates its core markets, with a wide moat and a renewed focus after years of sub-par acquisitions.

If you want to buy the stock then you can sell the April $22 put option. The strike is just slightly above the current market price, meaning that the option will be exercised if the stock price remains the same. A premium of $68 per contract knocks your effective purchase price down to $21.32 if the option is exercised. Otherwise the premium represents a 3.09% return over 38 days.

If you want to generate income then you can sell the April $21 put option. The buffer against exercise is about 3.2%, and the premium of $24 per contract represents a 1.1% return over 38 days, or 11% annualized.

If you want a bigger buffer against a stock decline you could sell the June $20 put option. The buffer here is 7.8%, and the premium of $39 per contract represents a 1.95% return over 109 days, or 7% annualized.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Burger Kings: The 10 Most Expensive Burgers in the World

The 10 Most Ethnically Diverse Countries in the World

The 10 Most Exclusive Credit Cards in the World

The 10 Most Expensive Cruise Ships in the World

The 10 Fastest Supercomputers in the World

The 10 Best Countries for Doing Business 2015

6 Most Expensive Fruits In The World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!