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
Comments
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

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

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!