3 Option Trades That Win Either Way

06/21/2012 9:25 am EST

Focus: OPTIONS

These Internet stocks are such steady cash-flow generators that option traders’ worst-case scenario could be collecting some premium and winding up with a high-quality stock at or near expiry, writes Lawrence Meyers of InvestorPlace.com.

There are three world-class operations whose businesses are all about the Internet. The wonderful thing about each of these businesses is they are cash-flow monsters. That means that while earnings may flop around, their cash flow is so substantial that not only will they never go bankrupt, but cash will always support the stock price in the long run.

IAC Interactive (IACI) is Barry Diller’s conglomerate of Web sites that includes Ask.com, Dictionary.com, Match.com, Chemistry.com, OKCupid.com, ServiceMatch, 1800Contractor.com, collegehumor.com, and zillions of others.

It generates more than $300 million annually in free cash. The stock has been all over the place historically, but since the financial crisis, it has marched steadily upwards. It’s certainly a good idea to go long the stock, but for those who prefer to hedge their bets or just want to generate income from a solid stock that isn’t going to crater, it’s a winner.

I would suggest two moves.

  1. Buy the stock now, at $45 and change, and…
  2. Sell the August 45 call for $2.60

Then, I’d continue to sell covered calls as long as it wasn’t called away, or buy it back if it is and sell the calls again.

Alternatively, I’d sell naked August 45 puts for $2. If the stock doesn’t get put to you, enjoy the premium. If it does, be glad to take the stock, then turn around and sell a covered call.

I’d use the same strategy with John Malone’s great collection of e-commerce Web sites under the name Liberty Interactive (LINTA). The company contains such first-class names as QVC, Provide Commerce (ProFlowers.com), Backcountry.com, Bodybuilding.com, Evite, TripAdvisor, and a piece of Expedia (EXPE).

Free cash flow is anywhere from $600 million to $1 billion annually. Buy the stock at $16.70 and sell the August 17 calls or the naked August 16 puts (prices aren’t available as I write this). Once again, LINTA is a fine stock to hold that isn’t incredibly volatile, so you’ll take advantage of the company’s consistency and collect premiums month after month.

Amazon.com (AMZN) is a bit more speculative. We all know the company is solid: free cash flow was $2 billion in 2011. It’s the Internet juggernaut, however, the stock is much more volatile, and it’s subject to double-digit moves around earnings announcements.

As a result, I suggest selling covered calls and naked puts before and after earnings. At $224, I think you’re totally safe to sell a July 225 call for $6.20 or the naked July 225 put for $7.25. Again, worst-case scenario is that you collect the premium and get a great stock.

By Lawrence Meyers, contributor, InvestorPlace.com

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