Summary
- Selling naked, or cash-secured puts, in this volatile environment can be very profitable.
- However, you must choose a value stock selling at a heavy discount.
- Cinemark is just such a stock.
- If not put to you, you'll walk away with a 13% return in one month.
- If put to you, you'll get the money at the stock at an insane bargain price.
As any option trader knows, volatility generates higher premiums.
When the market is behaving normally, and we are in a flat or bull market, selling naked puts can be a solid, reliable, and relatively low-risk way to generate regular income.
But what happens when we get blindsided by a market crash and stocks get put to us?
That's exactly why you cannot sell naked puts willy-nilly against any old stock that offers a juicy premium.
You must be highly selective, and that means selling naked puts against value stocks.
The theory is that a value stock is already cheap and selling below intrinsic value and, provided the story doesn't change, having it put to you is a perfectly acceptable outcome.
You are also aided in your hunt by following as many stocks as you can over a long period of time.
You will recognize trading patterns after a while.
You will understand why the market perceives certain stocks the way it does and know the reason why a stock sells off, creating even more value.
Thesis
Movie theaters are one of the businesses that have been shut down completely during the COVID-19 crisis.
As a result, everyone assumes that consumers have run to streaming services like Netflix (NFLX) and Amazon (AMZN), which is very likely the case.
Yet an assumption has also been made that this means consumers will not return to movie theatres.
That may or may not be true, so if you want to engage in today's suggested trade, you are in the camp that believes that movie attendance will not be terribly different than trends over the long-term.
Alternatively, you believe that if ticket volume declines, that movie theaters will retain a degree of pricing power to offset that.
